REGIONS FINANCIAL CORPORATION INTRODUCTION
The following discussion and analysis is part ofRegions Financial Corporation's ("Regions" or the "Company") Quarterly Report on Form 10-Q filed with theSEC and updates Regions' Annual Report on Form 10-K for the year endedDecember 31, 2019 , which was previously filed with theSEC . 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 13 "Recent Accounting Pronouncements" to the consolidated financial statements for further detail. The emphasis of this discussion will be on the three and six months endedJune 30, 2020 compared to the three and six months endedJune 30, 2019 for the consolidated statements of operations. For the consolidated balance sheets, the emphasis of this discussion will be the balances as ofJune 30, 2020 compared toDecember 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 inBirmingham, Alabama , that operates in the South, Midwest andTexas . 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 throughRegions Bank , anAlabama state-chartered commercial bank that is a member of theFederal Reserve System . AtJune 30, 2020 , Regions operated 1,391 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 11 "Business Segment Information" to the consolidated financial statements for more information regarding Regions' segment reporting structure. OnMay 31, 2019 , Regions entered into an agreement to acquireHighland Associates, Inc. , an institutional investment firm based inBirmingham, Alabama . The transaction closed onAugust 1, 2019 . OnFebruary 27, 2020 , Regions entered into an agreement to acquireAscentium Capital LLC , an independent equipment financing company headquartered inKingwood, Texas . The transaction closed onApril 1, 2020 , and included approximately$1.9 billion in loans and leases to small businesses. Refer to the "Ascentium Acquisition" section for more detail. 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. SECOND 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 theU.S. and the primary markets in which it operates. After a brief but violent contraction in economic activity stemming from the COVID-19 pandemic and the efforts to stem its spread, theU.S. economy had begun to recover during the second quarter. However, a sharp increase in COVID-19 cases was seen in early July. While this increase in cases is more likely to slow, rather than suppress, the economic recovery, it nonetheless adds another layer of uncertainty over economic forecasts. For full-year 2020, real GDP is expected to contract by 5.8 percent and to grow by 3.3 percent in 2021. 57
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Economic activity bottomed at the end ofApril 2020 . By the end of May, each state had taken steps to ease restrictions on economic activity, though these steps varied across individual states. May marked the beginning of economic improvement with the addition of over 2.6 million non-farm jobs, a rebound in consumer spending, and improved conditions in the industrial sector. Further economic improvement was experienced in June with both the ISM Manufacturing Index and the ISM Non-Manufacturing index pushing above the 50 percent break between contraction and expansion and non-farm payrolls rising by 4.8 million jobs. Additionally, motor vehicle sales rebounded sharply through June and applications for purchase loans stood at more than a 12-year high based on the MBA's weekly survey data. The economy has clearly benefitted from the aggressive fiscal and monetary policy response in the early phases of the pandemic. As the spike in the number of positive COVID-19 tests persisted into early July, several state and local governments rolled back some of the reopening measures, with most of the interventions directed at bars and restaurants. The policy response, at least thus far, has come in the form of targeted interventions rather than re-imposing the broad shutdowns seen in the early phases of the pandemic, which should limit the disruption to the economy. Barring a more intense and geographically dispersed increase in the number of COVID-19 cases than seen thus far, it is likely these targeted interventions will be the template for policy makers to deal with any subsequent spikes in cases. Aside from the potential fallout from the policy response, consumer and business confidence could be adversely impacted by rising numbers of COVID-19 cases, which could in turn weigh on growth in consumer spending and slow the pace of improvement in the labor market. Nonetheless, after what are likely to be extraordinarily large swings in real GDP in the second quarter (contraction) and the third quarter (expansion) of 2020, the economy is likely to settle on a path of steady but moderate growth over subsequent quarters. Though many households are facing an "income cliff" at the end of July as the supplemental unemployment insurance benefits provided by the CARES Act are set to expire, it is likely that fiscal and monetary policy will remain supportive of the economic recovery. TheJuly 2020 baseline forecast anticipates that it will be 10 to 12 quarters before the level of real GDP returns to the level from the fourth quarter of 2019, which is the last quarter free of the effects of COVID-19. The effects within the Regions footprint will be broadly similar to those seen in theU.S. as a whole.Florida's economy has an above-average exposure to leisure and hospitality services, whileTexas andLouisiana have above-average exposure to energy, so these economies could be more prone to lasting effects if the recovery does prove to be slower than is now anticipated. The continued economic uncertainty, as described above, impacted Regions' forecast utilized in calculating the ACL as ofJune 30, 2020 . 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 ofJune 30, 2020 driven by the COVID-19 pandemic continued to impact the second 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. Even as businesses re-open across the country, Regions continued to keep measures in place to ensure associate and customer safety, such as continuing to limit in-person branch activity to drive-through and in-office services to appointment only. As ofJune 30, 2020 , approximately 95% of branches were open. Regions is in the process of implementing a phased approach to return remote working associates to office locations. As ofJune 30, 2020 , approximately 90 percent of the Company's non-branch associates are working remotely. During the second quarter of 2020, the Company continued to offer special financial assistance to support customers who were experiencing financial hardships related to the COVID-19 pandemic. This assistance included offering customer payment deferrals or forbearances to existing loans over a set period of time, typically 90 days. Residential mortgage payment assistance is granted through a forbearance. During the forbearance period, a borrower's payment obligation is suspended and no foreclosure action will be pursued. All payments are then due at expiration of the forbearance period, unless the loan has been modified. For most other loan products (commercial and consumer products except for residential real estate), payment assistance is granted through deferrals or extensions. Deferrals and extensions are different than forbearances in that all payments are normally not due at the end of the deferral or extension period. Instead, the payment due date is advanced. However, for most all products, interest continues to accrue on the loan during the deferral or forbearance period, unless the loan is on non-accrual. As ofJune 30, 2020 , Regions had processed approximately 27,200 consumer payment deferral requests totaling$1.9 billion , including approximately 5,500 forbearances related to residential mortgages totaling approximately$1.4 billion . During May and June of 2020, approximately 34% of borrowers made mortgage payments while in forbearance. Additionally, approximately 36% of borrowers made home equity payments, approximately 56% made credit card payments, and approximately 41% made auto loan payments while in deferral. In addition, payment deferral requests for approximately 18,100 mortgage loans serviced for others have been processed totaling approximately$3.0 billion . Regions has also processed approximately 14,300 requests for business customers totaling approximately$3.8 billion . Approximately 25% of corporate banking borrowers, which excludesAscentium and branch small business customers, have made payments during May and June while in deferral. 58
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While a significant amount of payment deferrals and forbearances were granted in the second quarter of 2020, the deferrals and forbearances initially granted at the end ofMarch 2020 expired prior to the end of the second quarter. As ofJune 30, 2020 , approximately 2,160 residential first mortgage forbearances, totaling approximately$585 million , were scheduled to expire. As ofmid-July 2020 , approximately 37% of the forbearances scheduled to expire onJune 30, 2020 extended the forbearance periods by one to three months. Approximately 23% of the expired forbearances had either completed a loan modification or were in process of being modified. In addition, approximately 25% of the remaining expired forbearances were considered current because borrowers continued to make regular payments throughout the forbearance period. Regions is in process of contacting borrowers for the remaining 15% of these expired forbearances. As noted above, loan products other than residential first mortgage have payment deferrals or extensions which either advance the payment due date or adjust the amount due each period so the borrower is not past due. The majority of these borrowers do not consider a second deferral period until the next payment is due. As a result, it is early to ascertain what actions are being taken for these other loan products after their initial deferral period expiration. In many cases, Regions is being proactive and reaching out to borrowers with payment deferrals to determine their financial capacity and whether additional payment deferrals or loan modifications are needed. As ofmid-July 2020 , Regions has performed few second deferral requests for its consumer products (excluding residential first mortgage) and its commercial and investor real estate loans. As provided in the CARES Act passed into law onMarch 27, 2020 , certain loan modifications related to COVID-19 beginningMarch 1, 2020 through the earlier of 60 days after the national emergency concerning the COVID-19 outbreak ends orDecember 31, 2020 are eligible for relief from TDR classification. Refer to Table 15 "Troubled Debt Restructurings" for further information. As a certified SBA lender, Regions experienced an increase in lending activity in the second quarter of 2020 as the Company continued to assist customers through the loan process under the PPP. Under this program, Regions has approximately 44,600 loans outstanding totaling approximately$4.5 billion as ofJune 30, 2020 . 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 theFederal Reserve , borrowing capacity at theFederal Home Loan Bank , unencumbered highly liquid securities, and borrowing availability at theFederal Reserve's discount window. See the "Liquidity", "Shareholders' Equity", and "Regulatory Capital " sections for further information. The COVID-19 pandemic affected the second quarter provision for credit losses, which was$882 million in total and$700 million in excess of net charge-offs (see below and the "Allowance for Credit Losses" section for further detail). Loan and deposit balances also increased due to the current environment. Contributing to the ending loan balance increase was$4.5 billion of lending through the PPP. Ending deposit levels continued to increase as customers have retained excess cash from line draws, PPP loans, and other government stimulus funds. See Table 2 "Loan Portfolio" and Table 19 "Deposits" for further information. The COVID-19 pandemic also affected non-interest income. At the beginning of the second quarter of 2020, consumer spending remained low due to "non essential" business closures, but did start to increase during the quarter as restrictions on economic activity were eased throughout the country. Overall, customer spending activity negatively impacted non-interest income as evidenced by reductions in service charges of$47 million and card and ATM fess of$4 million compared to the first quarter. If current spending levels persist, the Company estimates non-interest income will be negatively impacted by$10 million to$15 million per month from pre-March 2020 levels. See Table 28 "Non-Interest Income" for more detail. During the second quarter of 2020, Regions tested goodwill for impairment in light of the decline in the economic environment caused by the COVID-19 pandemic. The Company concluded that goodwill impairment did not exist. 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. Supervisory Stress Test Update OnJune 25, 2020 , theFederal Reserve indicated that the Company exceeded all minimum capital levels under the supervisory stress test. The capital plan submitted to theFederal Reserve reflected no share repurchases through year-end 2020. The Company's preliminary stress capital buffer for the fourth quarter of 2020 through the third quarter of 2021 is currently estimated at 3 percent. TheFederal Reserve has provided specific limitations on capital distributions in the third quarter of 2020 that the Company will need to maintain compliance with in order to maintain its common stock dividend. OnJuly 22, 2020 , the Company declared a cash dividend for the third quarter of 2020 of$0.155 per share, which was in compliance with theFederal Reserve's limit. Second Quarter Results Regions reported net income (loss) available to common shareholders of$(237) million , or$(0.25) per diluted share, in the second quarter of 2020 compared to$374 million , or$0.37 per diluted share, in the second quarter of 2019. 59
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For the second quarter of 2020, net interest income (taxable-equivalent basis) totaled$985 million , up$29 million compared to the second quarter of 2019. The net interest margin (taxable-equivalent basis) was 3.19 percent for the second quarter of 2020 and 3.45 percent in the second quarter of 2019. The increase in net interest income was primarily driven by increases in loan balances due to PPP lending, the Company's equipment finance acquisition and increased [average] line utilization on commercial credit lines. Net interest income also benefited from the execution of the Company's interest rate hedging strategy. The decline in net interest margin was primarily driven by elevated levels of cash held at theFederal Reserve , an increase in average commercial line draws, and the impact of lower yielding PPP loans. The provision for credit losses totaled$882 million in the second quarter of 2020, after the adoption of CECL at the beginning of the year, as compared to the provision for loan losses of$92 million during the second quarter of 2019. The current quarter provision includes$182 million in net charge-offs, as well as$700 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 second quarter of 2020 was driven primarily by adverse economic conditions and uncertainty in the economic outlook resulting from the COVID-19 pandemic and credit deterioration as evidenced by the increase in both criticized and classified loans during the second quarter. Downgrades were primarily in the retail, energy, restaurant, and hotel portfolios (see Note 3 "Loans and the Allowance for Credit Losses" to the consolidated financial statements for additional information). Refer to the "Allowance for Credit Losses" section for further detail. Net charge-offs totaled$182 million , or an annualized 0.80 percent of average loans, in the second quarter of 2020, compared to$92 million , or an annualized 0.44 percent for the second quarter of 2019. The increase was driven primarily by charge-offs within the energy and restaurant portfolios, as well as additions related to the acquisition ofAscentium . See Note 3 "Loans and the Allowance for Credit Losses" to the consolidated financial statements for additional information. The allowance was 2.68 percent of total loans, net of unearned income atJune 30, 2020 compared to 1.10 percent atDecember 31, 2019 . The increase was impacted by all of the factors discussed above regarding the increase in the provision. Additionally in the second quarter of 2020, Regions completed the acquisition ofAscentium , and recognized an initial increase to the allowance of$60 million associated with the purchase of credit deteriorated loans. The allowance was 395 percent of total non-performing loans atJune 30, 2020 compared to 180 percent atDecember 31, 2019 . Total non-performing loans increased to 0.68 percent of total loans, net of unearned income, atJune 30, 2020 , compared to 0.61 percent atDecember 31, 2019 . The increase in non-performing loans was driven primarily by downgrades in administrative support, waste and repair, manufacturing, restaurant and energy-related credits. Refer to the "Allowance for Credit Losses" section of Management's Discussion and Analysis for further detail. Non-interest income was$573 million for the second quarter of 2020, a$79 million increase from the second quarter of 2019. The increase was primarily driven by higher mortgage and capital markets income, partially offset by lower service charges and card & ATM income. See Table 28 "Non-Interest Income" for more detail. Total non-interest expense was$924 million in the second quarter of 2020, a$63 million increase from the second quarter of 2019. The increase was primarily driven by higher salaries and employee benefits. See Table 29 "Non-Interest Expense" for more detail. Income tax expense (benefit) for the three months endedJune 30, 2020 was a$47 million benefit compared to$93 million expense 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$9.1 billion from year-end 2019 toJune 30, 2020 , due primarily to an increase in cash on deposit with the FRB. Significant deposit growth during the quarter has contributed to historically elevated liquidity sources for the Company. Commercial customer deposit levels have significantly increased as customers have kept their excess cash from line draws, PPP loans, and other government stimulus in their deposit accounts. Some of these liquidity sources were used to increase cash at the FRB. See the "Liquidity" and "Deposits" sections for more information. 60
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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 June 30, 2020 December 31, 2019 (In millions) U.S. Treasury securities $ 181 $ 182 Federal agency securities 42 43 Mortgage-backed securities: Residential agency 17,113 16,226 Residential non-agency 1 1 Commercial agency 5,829 5,388 Commercial non-agency 616 647 Corporate and other debt securities 1,371 1,451$ 25,153 $ 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$1.2 billion fromDecember 31, 2019 toJune 30, 2020 . Despite the interest rate volatility during the first half of 2020, 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 from year-end was the result of improved market valuation and additional purchases of mortgage-backed securities. 61
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LOANS HELD FOR SALE Loans held for sale totaled$1.2 billion atJune 30, 2020 , consisting of$950 million of residential real estate mortgage loans,$192 million of commercial mortgage and other loans, and$10 million of non-performing loans. AtDecember 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 70 percent of Regions' interest-earning assets atJune 30, 2020 . The following table presents the distribution of Regions' loan portfolio by portfolio segment and class, net of unearned income: Table 2-Loan Portfolio June 30, 2020 December 31, 2019 (In millions, net of unearned income) Commercial and industrial $ 47,670 $ 39,971 Commercial real estate mortgage-owner-occupied (1) 5,491 5,537 Commercial real estate construction-owner-occupied (1) 314 331 Total commercial 53,475 45,839 Commercial investor real estate mortgage 5,221 4,936 Commercial investor real estate construction 1,908 1,621 Total investor real estate 7,129 6,557 Residential first mortgage 15,382 14,485 Home equity lines 4,953 5,300 Home equity loans 2,937 3,084 Indirect-vehicles 1,331 1,812 Indirect-other consumer 3,022 3,249 Consumer credit card 1,213 1,387 Other consumer 1,106 1,250 Total consumer 29,944 30,567 $ 90,548 $ 82,963 __________ (1) Collectively referred to as CRE. 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 continue to experience the impact of the COVID-19 pandemic. In particular, Regions' energy, freight transportation, healthcare, travel and leisure, retail and restaurant portfolios have experienced significant operational challenges as a result of COVID-19 and are at the highest risk. Energy credits continue to be stressed even though oil prices slightly recovered during the second quarter. The restaurant portfolio, particularly credits in the casual dining space, also continues to come under stress even as shelter in place orders have been lifted. Small business sectors of the portfolio, as well as consumer portfolios, are being impacted by social distancing and limited capacity 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$7.7 billion since year-end 2019. This expansion was due to the origination of approximately$4.5 billion of PPP 62
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loans, the addition of$1.9 billion in loans related to theAscentium acquisition that occurred at the beginning of the second quarter (see the "Second Quarter Overview" and the "Ascentium Acquisition" sections for more information) and, to a lesser degree, elevated draws on commercial lines of credit. Line utilization levels approached normalized levels by the end of the second quarter. The expansion was driven by increases in the real estate, retail trade, manufacturing, healthcare and utilities industry sectors. Commercial also includes owner-occupied commercial real estate mortgage loans to operating businesses, which are loans for long-term financing of land and buildings, and are repaid by cash flows generated by business operations. Owner-occupied commercial real estate construction loans are made to commercial businesses for the development of land or construction of a building where the repayment is derived from revenues generated from the business of the borrower. Over half of the Company's total loans are included in the commercial portfolio segment. These balances are spread across numerous industries, as noted in the table below. The Company manages the related risks to this portfolio by setting certain lending limits for each significant industry. The following tables provide detail of Regions' commercial lending balances in selected industries. Table 3-Commercial Industry Exposure June 30, 2020 Unfunded Loans Commitments Total Exposure (In millions) Administrative, support, waste and repair$ 1,829 $ 979 $ 2,808 Agriculture 517 250 767 Educational services 3,172 902 4,074 Energy 2,195 2,108 4,303 Financial services 4,281 4,784 9,065 Government and public sector 3,044 606 3,650 Healthcare 4,797 2,389 7,186 Information 1,832 904 2,736 Manufacturing 5,176 4,157 9,333 Professional, scientific and technical services 2,601 1,415 4,016 Real estate (3) 8,431 6,907 15,338 Religious, leisure, personal and non-profit services 2,263 730 2,993 Restaurant, accommodation and lodging 2,480 338 2,818 Retail trade 3,119 1,891 5,010 Transportation and warehousing 2,701 1,176 3,877 Utilities 1,901 2,774 4,675 Wholesale goods 3,348 3,002 6,350 Other (1) (212 ) 2,180 1,968 Total commercial$ 53,475 $ 37,492 $ 90,967 63
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December 31, 2019 (2)
Unfunded
Loans 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 (3) 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.
(3) "Real estate" includes REITs, which are unsecured commercial and industrial
products that are real estate related.
Regions has identified certain industry sectors within the commercial and investor real estate portfolio segments that have the highest risk due to COVID-19 as ofJune 30, 2020 . These high-risk industries include energy, freight transportation, healthcare, other consumer services, restaurants, retail, travel and leisure, hotels and retail. Industries identified as high-risk may change in future periods depending on how the macroeconomic environment conditions develop over time. These identified high-risk industries, and specified sectors within these industries, are detailed in Table 4 below. PPP loan balances are not included in Table 4 as these loans are not considered high risk. Regions is closely monitoring customers in these industries and has frequent dialogue with these customers. Certain of these exposures are also represented in Table 5 through Table 8 below. All loans within these tables are in the commercial portfolio segment, unless specifically identified as IRE. 64
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Table 4-
June 30, 2020
Balance % of Total Leveraged % of
Outstanding Loans Utilization % Balance SNC % of Balance % Deferral % Criticized
($ in millions)
Commercial
Energy - E&P, oilfield
services $ 1,367 1.5 % 66 % - % 80 % 6 % 48 %
Freight transportation-
local general freight,
freight arrangement 261 0.3 % 80 % 6 % - % 23 % 5 %
Healthcare - offices of
physicians and other health
practitioners 1,130 1.2 % 72 % 4 % 4 % 32 % 4 %
Other consumer services -
personal care services,
religious organizations, dry
cleaning and laundry
services 463 0.5 % 75 % - % - % 29 % 8 %
Restaurants - full service,
special food services 798 0.9 % 86 % 21 % 40 % 29 % 32 %
Retail (non-essential) -
clothing 247 0.3 % 67 % - % 75 % 11 % 44 %
Travel and leisure -
amusement, arts and
recreation 649 0.7 % 76 % 37 % 48 % 17 % 17 %
Total commercial 4,915 5.4 % 73 % 10 % 40 % 21 % 25 %
REITs and IRE
Hotels - full service,
limited service, extended
stay 983 1.1 % 81 % - % 69 % 18 % 27 %
Retail (non-essential) -
malls and outlet centers 2,529 2.8 % 65 % - % 77 % 9 % 25 %
Total REITs and IRE 3,512 3.9 % 69 % - % 75 % 11 % 25 %
Total COVID-19 high-risk
industries $ 8,427
Energy
Regions' direct energy portfolio is comprised mostly of E&P and midstream sector
borrowers. As of June 30, 2020 , oil prices have rebounded from all-time lows in
April 2020 , but have not yet reached pre-pandemic levels. None of Regions'
direct energy credits are leveraged loans and Regions has no second lien energy
exposure. During the first six months of 2020, Regions has recognized
approximately $86 million in energy charge-offs, of which $84 million was
associated with four customers. Since first quarter 2015, utilization rates have
remained between 40-60%. Hedge positions are adequate for oil producers and
strong for natural gas providers, and 4% of energy loans are currently operating
under a COVID-19 payment deferral.
Table 5-Energy Industry Exposure
June 30, 2020
Balance Criticized
Outstanding % Outstanding Utilization Rate Balances % Criticized
(In millions)
Oilfield services and supply $ 360 17 % 70 % $ 187 52 %
E&P 1,007 46 % 65 % 472 47 %
Midstream 646 29 % 41 % 132 20 %
Downstream 97 4 % 26 % - - %
Other 72 3 % 25 % 43 60 %
PPP 13 1 % 100 % - - %
Total energy $ 2,195 100 % 51 % $ 834 38 %
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Restaurant
The quick service sector comprises over half of Regions' restaurant portfolio balances outstanding. Quarantining, social distancing, and reduced business travel as a result of the COVID-19 pandemic has and will continue to result in lost demand, much of which may not be recoverable. Casual dining is the sector under the most stress in the current environment. Quick service restaurants focus on fast food service and limited menus. This sector has performed relatively well during the pandemic given digital platforms, drive-through and delivery capabilities. The$798 million in COVID high-risk balances related to restaurants disclosed in Table 4 above are included across the quick service, casual dining and other sectors disclosed in Table 6 below. Approximately 18% of restaurant outstandings are leveraged. Prior to the COVID-19 pandemic, Regions strategically exited some higher risk restaurant relationships at par. Approximately 27% of restaurant, accommodation and lodging portfolio balances are in payment deferrals as ofJune 30, 2020 . During the first six months of 2020, Regions has recognized approximately$31 million in restaurant charge-offs. Table 6-Restaurant Industry Exposure June 30, 2020 Balance Criticized Outstanding % Outstanding Utilization Rate Balances % Criticized (In millions) Quick service $ 1,280 56 % 84 % $ 168 13 % Casual dining 487 21 % 87 % 254 52 % Other 149 6 % 90 % 20 13 % PPP 396 17 % 100 % - - % Total restaurant $ 2,312 100 % 87 % $ 442 19 % Hotel-related Regions' hotel-related portfolio is the most impacted property type given cancellations of events, conventions, and most business and leisure travel. While demand is expected to increase in 2021, the average daily rate will likely be slower to recover. Regions' hotel-related portfolio is primarily comprised of 12 REIT customers. These loans are unsecured commercial and industrial loans; however, they are real estate related. The REIT portfolio benefits from low leverage, strong liquidity, and diversity of property holdings. Companies have also taken proactive steps to reduce capital expenditures, cut dividends, and reduce overhead to preserve cash. SNCs comprise 59% of Regions' total hotel-related loans. Most of Regions' borrowers for secured hotel loans have requested deferrals. As noted above, approximately 27% of restaurant, accommodation and lodging portfolio balances are in payment deferrals as ofJune 30, 2020 . During the first six months of 2020, Regions has recognized no charge-offs in hotel related lending. REITs and IRE balances in the table below comprise the hotels COVID high-risk industry sector balance of$983 million disclosed in Table 4. The consumer services and PPP balances included in the table below along with the total restaurants balance in Table 6 above comprise the restaurant, accommodation and lodging balance in Table 3 above. Table 7-Hotel-Related Industry Exposure June 30, 2020 Balance Criticized Outstanding % Outstanding Utilization Rate Balances % Criticized (In millions) Commercial: REITs $ 714 62 % 80 % $ - - % Consumer services 131 12 % 95 % 1 1 % PPP 37 3 % 100 % - - % Total commercial 882 77 % 1 1 % IRE: IRE - mortgage 238 21 % 96 % 236 99 % IRE - construction 31 2 % 39 % 31 100 % Total IRE 269 23 % 267 99 % Total hotel-related $ 1,151 100 % 83 % $ 268 23 % 66
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Table of Contents Retail-related Regions' retail-related industry is mainly comprised of REITs and non-leveraged commercial and industrial sectors. Approximately$553 million of outstanding balances across the REIT and IRE portfolios relate to shopping malls and outlet centers. Portfolio exposure to REITs specializing in enclosed malls consists of a small number of credits. Approximately 48% of mall REIT balances are investment grade with low leverage. The IRE portfolio is widely distributed. The largest tenants typically include "basic needs" anchors. However, almost all IRE retail credits were downgraded to criticized in the second quarter due to low rent collections and concerns over tenant viability in the long term. The commercial and industrial retail portfolio is also widely distributed. The largest categories include motor vehicle and parts dealers, building materials, garden equipment and supplies, and non-store retailers. Owner-occupied CRE consists primarily of small strip malls and convenience stores which are largely term loans where a higher utilization rate is expected. Approximately 6% of retail-related lending is operating in a deferral as ofJune 30, 2020 . During the first six months of 2020, Regions has recognized approximately$7 million in retail-related lending charge-offs. REIT and IRE balances totaling$2,529 million in the table below comprise the COVID high-risk REITs and IRE retail-related sector balance in Table 4. Portions of the commercial and industrial-not leveraged, CRE owner-occupied and asset-based lending balances in the table below comprise the$247 million of the COVID high-risk commercial retail sector in Table 4. Additionally, the commercial and industrial leveraged and non-leveraged, asset-based lending, PPP and CRE owner-occupied balances totaling$3,119 million in the table below comprise the retail trade commercial industry sector balance in Table 3. Table 8-Retail-Related Industry Exposure June 30, 2020 Balance Criticized Criticized Outstanding % Outstanding Utilization Rate balances percentage (In millions) Commercial: REITs $ 1,789 32 % 57 % $ 92 5 % Commercial and industrial- leveraged 229 4 % 60 % - - % Commercial and industrial- not leveraged 1,266 22 % 55 % 29 2 % Asset-based lending 588 10 % 48 % 163 28 % PPP 334 7 % 100 % - - % CRE- owner-occupied 702 12 % 94 % 24 3 % Total commercial 4,908 87 % 308 6 % IRE 740 13 % 94 % 532 72 % Total commercial and IRE retail-related $ 5,648 100 % 63 % $ 840 15 % 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$572 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$897 million in comparison to 2019 year-end balances. The increase in residential first mortgage loans was driven by an increase in originations due to historically low market interest rates during 2020. Approximately$3.4 billion in new loan originations were retained on the balance sheet through the first six 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$347 million in comparison to 2019 year-end balances. Substantially all of this portfolio was originated through Regions' branch network. 67
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Beginning inDecember 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. FromMay 2009 toDecember 2016 , home equity lines of credit had a 10-year draw period and a 10-year repayment term. Prior toMay 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. The following table presents information regarding the future principal payment reset dates for the Company's home equity lines of credit as ofJune 30, 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 9-Home Equity Lines of Credit - Future Principal Payment Resets First Lien % of Total Second Lien % of Total Total (Dollars in millions) 2020 69 1.40 % 56 1.12 % 125 2021 92 1.84 % 81 1.64 % 173 2022 101 2.03 % 97 1.96 % 198 2023 132 2.67 % 108 2.19 % 240 2024 184 3.71 % 145 2.92 % 329 2025-2029 1,948 39.33 % 1,727 34.87 % 3,675 2030-2034 133 2.69 % 74 1.51 % 207 Thereafter 3 0.07 % 3 0.05 % 6 Total 2,662 53.74 % 2,291 46.26 % 4,953 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$147 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. 68
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Table 10-Estimated Current Loan to Value Ranges
June 30, 2020
Residential Home Equity Lines of Credit Home Equity Loans
First Mortgage 1st Lien 2nd Lien 1st Lien 2nd Lien
(In millions)
Estimated current LTV:
Above 100% $ 32 $ 7 $ 9 $ 8 $ 4
80% - 100% 2,338 64 149 42 22
Below 80% 12,734 2,551 2,052 2,612 232
Data not available 278 40 81 13 4
$ 15,382 $ 2,662 $ 2,291 $ 2,675 $ 262
December 31, 2019
Residential Home Equity Lines of Credit Home Equity Loans
First Mortgage 1st Lien 2nd Lien 1st Lien 2nd Lien
(In millions)
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 $481 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
$227 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 $174 million from
year-end 2019 reflecting lower credit card transaction volume as customers react
to the economic environment.
Other Consumer
Other consumer loans primarily include direct consumer loans, overdrafts and
other revolving loans. Other consumer loans decreased $144 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 and the Allowance for Credit Losses" .
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 guidance (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.
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OnJanuary 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 13 "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 the adoption of CECL onJanuary 1, 2020 , Regions has increased the allowance by$1.0 billion from$1.4 billion to$2.4 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 are presented in Table 11 below. While many of these items overlap regarding impact, they are included in the category most relevant. Table 11- Allowance Changes Three months endedJune 30, 2020 (In millions) Allowance for credit losses atApril 1 $
1,665
Initial allowance on acquired PCD loans
60
Provision over net charge-offs:
Economic outlook and adjustments 287 Changes in portfolio credit quality 382 Changes in specific reserves (10 ) Portfolio growth (run-off) (1) (35 ) Provision impact of non-PCD acquired loans(3) 76 Total provision over net charge-offs
700
Allowance for credit losses at June 30 $ 2,425
Six months ended June 30, 2020
(In millions)
Allowance for credit losses at
$ 1,415
Initial allowance on acquired PCD loans
60
Provision over net charge-offs:
Economic outlook and adjustments 510 Changes in portfolio credit quality 424 Changes in specific reserves 26 Portfolio growth (run-off) (1) (86 ) Provision impact of non-PCD acquired loans(3) 76 Total provision over net charge-offs
950
Allowance for credit losses atJune 30 $
2,425
_______
(1) Portfolio growth does not include PPP loans of
backed by the
(2) Regions adopted the CECL accounting guidance on
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.
(3) This balance includes
non-PCD loans acquired as part of the
There continues to be a significant amount of uncertainty surrounding the
economic environment due to the COVID-19 pandemic. Elevated unfavorable credit
metrics and charge-offs, deferrals and forbearances, continued low consumer
spending and the potential for a second wave of the pandemic are all negative
signs of the current economic landscape. Conversely, unprecedented stimulus is
working its way through the economic system, with early signs that the deferral
programs are working (as evidenced by a high savings rate). Consumers entered
the COVID-19 crisis in a stronger position compared to the economic downturn in
2007 and, with the unemployment stimulus, many on unemployment have higher cash
flows than when they were employed. Additionally, mortgage LTVs and the HPI are
holding up well. As the credit risk within Regions' loan portfolio continues to
be
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evaluated going into the second half of 2020, the negative and positive factors of the ever-evolving economic landscape were considered in determining the allowance estimate. Credit metrics are monitored throughout the quarter in order to understand external macro-views of credit metrics, trends and industry outlooks as well as Regions' internal specific views of credit metrics and trends. The second quarter of 2020 exhibited continued signs of economic stress due to the COVID-19 pandemic, as commercial and investor real estate criticized balances increased approximately$1.7 billion and classified balances increased$491 million compared to the first quarter. Non-performing loans excluding held for sale decreased$24 million compared to the first quarter; however, total net charge-offs increased$59 million during the second quarter. Approximately$8.4 billion of commercial and investor real estate loans are in COVID-19 high-risk industry segments. These high-risk industries include energy, freight transportation, healthcare, other consumer services, restaurants, retail, travel and leisure, hotels and retail commercial real estate. Refer to the "Portfolio Characteristics" section for more information about the high-risk industries. Regions purchasedAscentium , an independent equipment financing company onApril 1, 2020 . The purchase included approximately$1.9 billion in loans and leases to small businesses, of which approximately 46% were considered to be PCD. Regions considered loan payment status, COVID-19 deferral status, and loans in high-risk industries in COVID-19 highly-impacted states in its determination of PCD. TheAscentium acquisition resulted in$136 million in additional allowance in the second quarter, of which$76 million was recorded through the provision for credit losses and the remaining$60 million was for acquired PCD loans and did not impact the provision for credit losses. See the "Ascentium Acquisition" section for more information. Changes in the macroeconomic environment can be extremely impactful to the allowance estimate under CECL. Regions' economic forecast utilized in theJanuary 1, 2020 allowance estimate upon adoption of CECL considered a relatively benign economic environment. The forecast utilized in theMarch 31, 2020 allowance estimate considered a more stressed economic environment due to COVID-19 pandemic based on early stage pandemic information. The economic forecast utilized in theJune 30, 2020 allowance estimate included further deterioration primarily due to higher levels of unemployment. Refer to the Economic Outlook section for more information. Regions benchmarked its internal forecast with external forecasts and external data available. Risks to the economic forecast included a high degree of uncertainty around how wide the COVID-19 pandemic could spread, how long it could persist, and the effectiveness of government relief programs and debt payment relief being provided by the Company. Also, the unique nature of the COVID-19 economic environment produced unintuitive modeled results due to sensitivity to the unemployment forecasts, specifically the transient spike in unemployment rates. The CECL models are not built or conditioned to reflect the unprecedented levels of stimulus and cannot anticipate (or connect) the new relationships between economic variables and portfolio risks that exist in the current environment. There were several points of analysis used to inform appropriate model adjustments for economic uncertainty. Industry-level stress analyses were also performed on industries most acutely impacted by the COVID-19 pandemic. Refer to the "Portfolio Characteristics" section for more information about COVID-19 impacted industries. These economic uncertainties and model limitations were evaluated and resulted in a reduction to the modeled life of loan loss estimate. While Regions' quantitative allowance methodologies strive to reflect all risk factors, 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. TheJune 30, 2020 general imprecision allowance considered the incremental risk specific to COVID-19 payment deferrals and delinquency trends for certain consumer models that are not economically conditioned and as such does not fully consider these impacts. The components of the changes in the ACL during 2020 are reflected in Table 11 above. The decrease in ACL related to portfolio runoff for the six months endedJune 30, 2020 was primarily due to a reduction in indirect-other consumer and credit card balances which carry a relatively higher allowance. Additionally, first quarter growth in commercial loans occurred in lower risk rating tranches, while balance runoff occurred in higher risk rating tranches. The table below reflects a range of macroeconomic factors utilized in the Base forecast over the two-year R&S forecast period as ofJune 30, 2020 . The unemployment rate is the most significant macroeconomic factor among the CECL models. As noted above, theJune 30, 2020 allowance includes a reduction to the modeled Base forecast to adjust for over-sensitivity within the models, specifically for unemployment. Table 12- Macroeconomic Factors in the Forecast Base R&S Forecast Pre-R&S Period June 30, 2020 2Q2020 3Q2020 4Q2020 1Q2021 2Q2021 3Q2021 4Q2021 1Q2022 2Q2022 Real GDP, annualized % change (37.90 )% 25.60 % 9.00 % 5.60 % 4.10 % 3.00 % 2.90 % 2.60 % 2.80 % Unemployment rate 13.20 % 9.90 % 9.10 % 8.60 % 7.90 % 7.40 % 7.00 % 6.70 % 6.50 % HPI, year-over-year % change 5.70 % 5.00 % 3.20 % 1.30 % (0.50 )% (0.30 )% 1.30 % 2.80 % 3.60 % S&P 500 2,959 3,232 3,253 3,270 3,283 3,313 3,347 3,375 3,398 71
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Based on the overall analysis performed, management deemed an increase in the allowance of$760 million as compared toMarch 31, 2020 to be appropriate to absorb expected credit losses in the loan and credit commitment portfolios as ofJune 30, 2020 . InJune 2020 , theFederal Reserve disclosed their estimated modeled credit losses for Regions as a part of the supervisory stress test. TheFederal Reserve's economic scenario resulted in estimated losses for Regions of$5.3 billion . Whereas this scenario assumed a different macroeconomic outlook than Regions', it may represent a possible range of potential credit losses assuming a longer-term, widespread pandemic. As a point of clarification, theFederal Reserve's scenario assumes severe deterioration across both business services (commercial and investor real estate) and consumer portfolios, while Regions assumes deterioration mainly in the business services portfolio. Additionally, theFederal Reserve's estimate includes no benefit of government stimulus or benefit from debt payment relief being offered by Regions and other financial institutions. See the "Second Quarter Overview" section for further information regarding the Company's economic outlook. 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, including changes resulting from various pandemic scenarios, the impact of government stimulus, and 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 13 "Allowance for Credit Losses." As noted above, economic trends such as interest rates, unemployment, 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 and beyond. 72
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Table 13-Allowance for Credit Losses
Six Months Ended June 30
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,
1,307 840
Loans charged-off:
Commercial and industrial 207 69
Commercial real estate mortgage-owner-occupied 6 5
Residential first mortgage 2 3
Home equity lines 7 8
Home equity loans 1 3
Indirect-vehicles 12 15
Indirect-other consumer 41 35
Consumer credit card 33 34
Other consumer 39 43
348 215
Recoveries of loans previously charged-off:
Commercial and industrial 14 12
Commercial real estate mortgage-owner-occupied 3 3
Commercial investor real estate mortgage 1 1
Commercial investor real estate construction - 1
Residential first mortgage 2 2
Home equity lines 5 6
Home equity loans 1 2
Indirect-vehicles 5 7
Indirect-other consumer - -
Consumer credit card 5 4
Other consumer 7 7
43 45
Net charge-offs:
Commercial and industrial 193 57
Commercial real estate mortgage-owner-occupied 3 2
Commercial investor real estate mortgage (1 ) (1 )
Commercial investor real estate construction - (1 )
Residential first mortgage - 1
Home equity lines 2 2
Home equity loans - 1
Indirect-vehicles 7 8
Indirect-other consumer 41 35
Consumer credit card 28 30
Other consumer 32 36
305 170
Provision for loan losses 1,214 183
Initial allowance on acquired PCD loans 60 -
Allowance for loan losses at June 30 2,276 853
Reserve for unfunded credit commitments at beginning of year
45 51
Cumulative change in accounting guidance (1) 63 -
Provision (credit) for unfunded credit losses 41 (1 )
Reserve for unfunded credit commitments at June 30 149 50
Allowance for credit losses at June 30 $ 2,425 $ 903
Loans, net of unearned income, outstanding at end of period $ 90,548 $ 83,553
Average loans, net of unearned income, outstanding for the
period $ 87,607 $ 83,816
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Six Months Ended June 30
2020 2019
(Dollars in millions)
Ratios:
Allowance for credit losses at end of period to loans, net
of unearned income 2.68 % 1.08 %
Allowance for credit losses at end of period to loans, excluding PPP, net (non-GAAP) (2)
2.82 % 1.08 %
Allowance for loan losses at end of period to loans, net of unearned income
2.51 % 1.02 %
Allowance for credit losses at end of period to
non-performing loans, excluding loans held for sale 395 % 169 %
Allowance for loan losses at end of period to
non-performing loans, excluding loans held for sale 370 % 160 %
Net charge-offs as percentage of average loans, net of unearned income (annualized)
0.70 % 0.41 %
_______
(1) Regions adopted the CECL accounting guidance on
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.
(2) See Table 23 for calculation.
Allocation of the allowance for credit losses by portfolio segment and class is
summarized as follows:
Table 14-Allowance Allocation
June 30, 2020 January 1, 2020
Allowance Allowance to Allowance Allowance to
Loan Balance Allocation Loans % Loan Balance Allocation Loans %
Commercial and industrial $ 47,670 $ 1,109 2.33 % $ 39,971 $ 443 1.11 %
Commercial real estate
mortgage-owner-occupied 5,491 249 4.53 % 5,537 153 2.76 %
Commercial real estate
construction-owner-occupied 314 20 6.37 % 331 14 4.23 %
Total commercial 53,475 1,378 2.58 % 45,839 610 1.33 %
Commercial investor real estate
mortgage 5,221 132 2.53 % 4,936 54 1.09 %
Commercial investor real estate
construction 1,908 55 2.88 % 1,621 16 0.99 %
Total investor real estate 7,129 187 2.62 % 6,557 70 1.07 %
Residential first mortgage 15,382 151 0.98 % 14,485 86 0.59 %
Home equity lines 4,953 146 2.95 % 5,300 144 2.72 %
Home equity loans 2,937 42 1.43 % 3,084 32 1.04 %
Indirect-vehicles 1,331 34 2.55 % 1,812 26 1.43 %
Indirect-other consumer 3,022 278 9.20 % 3,249 267 8.22 %
Consumer credit card 1,213 143 11.79 % 1,387 112 8.07 %
Other consumer 1,106 66 5.97 % 1,250 68 5.44 %
Total consumer 29,944 860 2.87 % 30,567 735 2.40 %
$ 90,548 $ 2,425 2.68 % $ 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.
Under Regions' COVID-19 deferral and forbearance programs, customer payments are
deferred for a period of time, typically 90 days. During this time, a customer's
loan is not considered past due and continues to accrue interest (unless it is a
nonperforming loans). As of June 30, 2020 , the initial 90-day deferral period
had expired for a portion of COVID-19 modified loans. Upon expiration of the
deferral period, customers may apply for additional relief or resume making
payments on their loans. Repayment plans for the deferrals differ depending on
the loan type and repayment ability of the borrower. The CARES Act relief and
short-term nature of most COVID-19 deferrals precluded these modifications from
being classified as TDRs as of June 30, 2020 .
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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:
Table 15-Troubled Debt Restructurings
June 30, 2020 December 31, 2019
Loan Allowance for Credit Loan Allowance for Credit
Balance Losses Balance Losses
(In millions)
Accruing:
Commercial $ 49 $ 4 $ 106 $ 15
Investor real estate 6 1 32 3
Residential first mortgage 178 24 177 18
Home equity lines 38 6 42 2
Home equity loans 90 10 109 5
Consumer credit card 1 - 1 -
Other consumer 3 - 4 -
365 45 471 43
Non-accrual status or 90 days past
due and still accruing:
Commercial 214 9 139 20
Investor real estate - - 1 -
Residential first mortgage 37 5 40 4
Home equity lines 3 - 2 -
Home equity loans 7 1 6 -
261 15 188 24
Total TDRs - Loans $ 626 $ 60 $ 659 $ 67
TDRs - Held For Sale - - 1 -
Total TDRs $ 626 $ 60 $ 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.
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Table 16-Analysis of Changes in Commercial and Investor Real Estate TDRs
Six Months Ended June 30, 2020 Six Months Ended June 30, 2019
Investor Investor
Commercial Real Estate Commercial Real Estate
(In millions)
Balance, beginning of period $ 245 $ 33 $ 291 $ 19
Additions 208 - 100 2
Charge-offs (52 ) - (14 ) -
Other activity, inclusive of payments and
removals (1) (138 ) (27 ) (94 ) (1 )
Balance, end of period $ 263 $ 6 $ 283 $ 20
_________
(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 $17 million of commercial loans and $12
million of investor real estate loans refinanced or restructured as new loans
and removed from TDR classification for the six months ended June 30, 2020 .
During the six months ended June 30, 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.
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NON-PERFORMING ASSETS Non-performing assets are summarized as follows:
Table 17-Non-Performing Assets
June 30, 2020 December 31, 2019
(Dollars in millions)
Non-performing loans:
Commercial and industrial $ 445 $ 347
Commercial real estate mortgage-owner-occupied 74 73
Commercial real estate construction-owner-occupied 10 11
Total commercial 529 431
Commercial investor real estate mortgage 1 2
Total investor real estate 1 2
Residential first mortgage 32 27
Home equity lines 46 41
Home equity loans 6 6
Total consumer 84 74Total non-performing loans, excluding loans held for sale
614 507
Non-performing loans held for sale 10 13
Total non-performing loans(1) 624 520
Foreclosed properties 43 53
Non-marketable investments received in foreclosure - 5
Total non-performing assets(1) $ 667 $ 578
Accruing loans 90 days past due:
Commercial and industrial $ 11 $ 11
Commercial real estate mortgage-owner-occupied 3 1
Total commercial 14 12
Residential first mortgage(2) 75 70
Home equity lines 26 32
Home equity loans 12 10
Indirect-vehicles 8 7
Indirect-other consumer 3 3
Consumer credit card 17 19
Other consumer 5 5
Total consumer 146 146
$ 160 $ 158Non-performing loans(1) to loans and non-performing loans held for sale
0.69 % 0.63 %
Non-performing assets(1) to loans, foreclosed
properties, non-marketable investments, and
non-performing loans held for sale 0.74 % 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
2019.
Non-performing loans atJune 30, 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. 77
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AtJune 30, 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$325 million to$475 million . The estimated range increased from the first quarter estimated range of$225 million to$350 million due to certain large dollar investor real estate, energy and natural resources, manufacturing and restaurant commercial loans that represent potential for migration in the third quarter. 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 18- Analysis of Non-Accrual Loans Non-Accrual Loans, Excluding Loans Held for Sale Six Months Ended June 30, 2020 Investor Commercial Real Estate Consumer(1) Total (In millions) Balance at beginning of period$ 431 $ 2 $ 74$ 507 Additions 432 1 12 445 Net payments/other activity (99 ) (2 ) (2 ) (103 ) Return to accrual (13 ) - - (13 ) Charge-offs on non-accrual loans(2) (195 ) - - (195 ) Transfers to held for sale(3) (11 ) - - (11 ) Transfers to real estate owned (4 ) - - (4 ) Sales (12 ) - - (12 ) Balance at end of period$ 529 $ 1 $ 84$ 614 Non-Accrual Loans,
Excluding Loans Held for Sale
Six Months Ended June 30, 2019
Investor
Commercial Real Estate Consumer(1) Total
(In millions)
Balance at beginning of period
$ 103 $ 496 Additions 250 1 - 251 Net payments/other activity (82 ) (4 ) (8 ) (94 ) Return to accrual (13 ) - - (13 ) Charge-offs on non-accrual loans(2) (63 ) - - (63 ) Transfers to held for sale(3) (22 ) - - (22 ) Transfers to real estate owned (2 ) - - (2 ) Sales (20 ) - - (20 ) Balance at end of period$ 430 $ 8 $ 95$ 533 ________
(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
million recorded upon transfer for the six months ended
2019, respectively.
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Goodwill totaled$5.2 billion atJune 30, 2020 and$4.8 billion atDecember 31, 2019 . The increase was related to the Company's acquisition ofAscentium during the second quarter of 2020. Based on recent events and circumstances, Regions concluded that a triggering event had occurred in the second quarter which required Regions to perform a quantitative goodwill impairment test. The results of the test did not require Regions to record a goodwill impairment charge as all three reporting units continued to have a fair value in excess of book value. Regions will continue to monitor for indicators of impairment throughout 2020. Refer to Note 5 "Goodwill" to the consolidated financial statements for further information. Refer to Note 1 "Summary of Significant Accounting Policies" to the consolidated financial statements included in the Annual Report on Form 10-K for the year endedDecember 31, 2019 for further discussion of when Regions tests goodwill for impairment and the Company's methodology and valuation approaches used to determine the estimated fair value of each reporting unit. DEPOSITS Regions competes with other banking and financial services companies for a share of the deposit market. Regions' ability to compete in the deposit market depends heavily on the pricing of its deposits and how effectively the Company meets customers' needs. Regions employs various means to meet those needs and enhance competitiveness, such as providing a high level of customer service, competitive pricing and convenient branch locations for its customers. Regions also serves customers through providing centralized, high-quality banking services and alternative product delivery channels such as mobile and internet banking. The following table summarizes deposits by category: Table 19-Deposits June 30, 2020 December 31, 2019 (In millions) Non-interest-bearing demand$ 47,964 $ 34,113 Savings 10,698 8,640 Interest-bearing transaction 22,407 20,046 Money market-domestic 29,263 25,326 Time deposits 6,428 7,442 Customer deposits 116,760 95,567 Corporate treasury time deposits 19 108 Corporate treasury other deposits - 1,800$ 116,779 $ 97,475 Total deposits atJune 30, 2020 increased approximately$19.3 billion compared to year-end 2019 levels, due to increases in non-interest-bearing demand, savings, interest-bearing transaction and domestic money market categories. These increases were offset by decreases in corporate treasury other deposits and customer time deposits. Non-interest-bearing demand deposits increased as customers began to pay down line of credit draws using liquidity sources outside of the bank and brought the elevated cash levels back to Regions. Savings, interest-bearing transaction and domestic money market categories increased due to customers choosing to keep excess cash from government stimulus and funds from PPP loans in their deposit accounts. Additionally, lower consumer spend due to the economic environment impacted increased balances. Customer time deposits decreased due to maturities during the second quarter, and lower rates during the second quarter drove a decrease in the utilization of time deposit accounts. Corporate treasury other deposits decreased as these deposits were used to supplement incremental balance sheet funding at year-end 2019, but were not utilized at the end of the second quarter of 2020. 79
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SHORT-TERM BORROWINGS Short-term borrowings, which consist of FHLB advances, were zero atJune 30, 2020 as compared to$2.1 billion atDecember 31, 2019 . The levels of these borrowings can fluctuate depending on the Company's funding needs and the sources utilized. FHLB borrowings decreased fromDecember 31, 2019 toJune 30, 2020 as the increase in deposits reduced the need for funding from the FHLB. 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 20-Long-Term BorrowingsJune 30, 2020
(In millions)
Regions Financial Corporation (Parent): 3.20% senior notes due February 2021 $ 359 $ 358 2.75% senior notes due August 2022 998 997 3.80% senior notes due August 2023 997 996 2.25% senior notes due April 2025 745 - 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 3,768 2,950Regions Bank : FHLB advances 401 2,501 2.75% senior notes due April 2021 191 549 3 month LIBOR plus 0.38% of floating rate senior notes due April 2021 66 350 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 Ascentium note securitizations 459 - Other long-term debt 30 32 Valuation adjustments on hedged long-term debt - 4 2,640 4,929 Total consolidated $ 6,408 $ 7,879 Long-term borrowings decreased by approximately$1.5 billion since year-end 2019, due primarily to the decrease in FHLB advances of$2.1 billion , partially offset by several other debt transactions. As mentioned above in the "Short-Term Borrowings" section, the increase in deposits also reduced the need for long-term borrowings from the FHLB. See the "Liquidity" section for further detail of Regions' borrowing capacity with the FHLB. In the second quarter of 2020, Regions issued$750 million of senior notes due 2025. The issuance was largely offset by a partial tender of the twoRegions Bank Senior Notes dueApril 2021 . In conjunction with the partial tender of the two senior bank notes and early terminations of FHLB advances, Regions incurred related early extinguishment pre-tax charges totaling$6 million . Lastly, through theAscentium acquisition, Regions acquired securitized borrowings, which the Company will manage within its broader liability management process and in line with the allowable terms of the contracts. Long-term FHLB advances have a weighted-average interest rate of 0.55 percent atJune 30, 2020 and 1.9 percent atDecember 31, 2019 , with remaining maturities ranging from less than 1 year to 8 years and a weighted-average of less than 1 year. TheAscentium note securitizations have various classes and have a weighted-average interest rate of 2.25% as ofJune 30, 2020 , with remaining maturities ranging from 4 years to 7 years and a weighted-average of 6.2 years. 80
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OnAugust 3, 2020 ,Regions Bank sent notices of redemption, which will result in the redemption onAugust 13, 2020 of itsSenior Fixed-to-Floating Rate Bank Notes dueAugust 13, 2021 and of its Senior Floating Rate Bank Notes dueAugust 13, 2021 pursuant to their terms, at an aggregate redemption price equal to the sum of 100% of the principal amount of the notes being redeemed and any accrued and unpaid interest to, but excluding, the redemption date. The aggregate principal balance of the two series of notes being redeemed is$1 billion . SHAREHOLDERS' EQUITY Shareholders' equity was$17.6 billion atJune 30, 2020 as compared to$16.3 billion atDecember 31, 2019 . During the first six months of 2020, net loss decreased shareholders' equity by$52 million , cash dividends on common stock reduced shareholders' equity by$298 million and cash dividends on preferred stock reduced shareholder's equity by$46 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$1.7 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 six months endedJune 30, 2020 . The derivative instruments are hedges designed to protect net interest income in a low short-term interest rate environment, such as the one that currently exists. Lastly, during the second quarter of 2020, the Company issued Series D preferred stock, which increased stockholders' equity by$346 million . Total equity includes noncontrolling interest of$26 million , representing the unowned portion of a low income housing tax credit fund syndication, of which Regions held the majority interest atJune 30, 2020 . OnJune 25, 2020 , theFederal Reserve indicated that the Company exceeded all minimum capital levels under the supervisory stress test. See Note 6 "Stockholders' Equity and Accumulated Other Comprehensive Income (Loss)" and the "Regulatory Capital Requirements" section for additional information. REGULATORY REQUIREMENTSRegions 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 lateMarch 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. This amount was approximately$613 million atJune 30, 2020 , an increase of$175 million fromMarch 31, 2020 . The impact of the addback on the CET1 ratio was approximately 56 basis points atJune 30, 2020 , an increase of 16 basis points fromMarch 31, 2020 . 81
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The following table summarizes the applicable holding company and bank regulatory requirements: Table 21-Regulatory Capital Requirements Transitional Basis Basel III Regulatory June 30, 2020 December 31, 2019 Minimum To Be Well Capital Rules Ratio (1) Ratio Requirement Capitalized Basel III common equity Tier 1 capital: Regions Financial Corporation 8.87 % 9.68 % 4.50 % N/A Regions Bank 11.06 11.58 4.50 6.50 % Tier 1 capital: Regions Financial Corporation 10.38 % 10.91 % 6.00 % 6.00 % Regions Bank 11.06 11.58 6.00 8.00 Total capital: Regions Financial Corporation 12.57 % 12.68 % 8.00 % 10.00 % Regions Bank 12.77 12.92 8.00 10.00 Leverage capital: Regions Financial Corporation 8.43 % 9.65 % 4.00 % N/A Regions Bank 9.00 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.
In the first quarter of 2020, theFederal Reserve finalized the stress capital buffer framework which, when implemented inOctober 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. During the second quarter of 2020, theFederal Reserve released the results of its supervisory stress test and indicated that Regions exceeded all minimum capital levels under the severely adverse scenario. Regions' preliminary stress capital buffer requirement for the fourth quarter of 2020 through the third quarter of 2021, as determined by theFederal Reserve , is 3.0%, representing the amount of capital degradation under the supervisory severely adverse scenario, inclusive of four quarters of planned common stock dividends. Regions' final stress capital buffer is to be determined byAugust 31, 2020 . TheFederal 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
Regions maintains a robust liquidity management framework designed to
effectively manage liquidity risk in accordance with sound risk management
principals, as well as regulatory requirements as applicable to Regions'
Category IV status under the tailoring rules. Regions' 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, cash flow forecasting, liquidity
stress testing, liquidity risk limits, contingency funding plans, and collateral
management. The framework is designed to simultaneously meet the expectations
of regulations, as well as be aligned with Regions' business mix and operating
model and their impact to liquidity management.
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.
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RATINGS
Table 22 "Credit Ratings" reflects the debt ratings information ofRegions Financial Corporation andRegions Bank by Standard and Poor's ("S&P"), Moody's, Fitch and Dominion Bond Rating Service ("DBRS"). Table 22-Credit Ratings As of June 30, 2020 S&P Moody's Fitch DBRSRegions 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 Stable Stable Stable As of December 31, 2019 S&P Moody's Fitch DBRSRegions 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. OnApril 3, 2020 , Moody's revised outlooks forRegions Bank andRegions Financial Corporation to stable from positive citing expectations for a contracting economy in 2020 which is expected to have a direct negative impact onU.S. banks' asset quality and profitability. OnApril 9, 2020 , Fitch revised the outlook forRegions Financial Corporation to stable from positive as part of an overall revision of itsU.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 endedDecember 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. 83
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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", "ending total loans excluding PPP, net", "ACL to adjusted ending total loans ratio", "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
Average total loans are presented excluding the indirect vehicles exit portfolio to arrive at adjusted average total loans (non-GAAP). Regions believes adjusting average total loans provides a meaningful calculation of loan growth rates and presents them on the same basis as that applied by management. Ending total loans are presented excluding loan balances related to loans originated through the SBA's PPP program. Regions believes the related ACL to adjusted ending loans ratio provides meaningful information about credit loss allowance levels when the SBA's PPP loans, which are fully backed by theU.S. government, are excluded from total loans. 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, theFederal 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. 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 ending total loans excluding PPP loans and a computation of ACL to ending loans excluding PPP loans, 3) a reconciliation of net income (loss) (GAAP) to net income (loss) 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). 84
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Table 23-GAAP to Non-GAAP Reconciliations
Three Months Ended June 30 Six Months Ended June 30
2020 2019 2020 2019
(Dollars in millions)
ADJUSTED AVERAGE BALANCES OF LOANS
Average total loans $ 91,964 $ 83,905 $ 87,607 $ 83,816
Less: Indirect-vehicles 1,441 2,578 1,561 2,750
Adjusted average total loans (non-GAAP) $ 90,523 $ 81,327 $ 86,046 $ 81,066
June 30, 2020 December 31, 2019 June 30, 2019
(Dollars in millions)
ACL/LOANS, EXCLUDING PPP, NET
Ending total loans $ 90,548 $ 82,963 $ 83,553
Less: SBA PPP loans 4,498 - -
Ending total loans excluding PPP, net
(non-GAAP) $ 86,050 $ 82,963 $ 83,553
ACL at period end $ 2,425 $ 914 $ 903
ACL/Loans, excluding PPP, net (non-GAAP) 2.82 % 1.10 % 1.08 %
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Three Months Ended June 30 Six Months Ended June 30
2020 2019 2020 2019
(Dollars in millions)
INCOME (LOSS)
Net income (loss) (GAAP) $ (214 ) $ 390 $ (52 ) $ 784
Preferred dividends (GAAP) (23 ) (16 ) (46 ) (32 )
Net income (loss) available to common
shareholders (GAAP) A $ (237 ) $ 374 $ (98 ) $ 752
ADJUSTED EFFICIENCY AND FEE INCOME RATIOS
Non-interest expense (GAAP) B $ 924 $ 861 $ 1,760 $ 1,721
Significant items:
Branch consolidation, property and
equipment charges (10 ) (2 ) (21 ) (8 )
Salary and employee benefits-severance
charges (2 ) (2 ) (3 ) (4 )
Loss on early extinguishment of debt (6 ) - (6 ) -
Professional, legal and regulatory expenses (7 ) - (7 ) -
Acquisition expenses (1 ) - (1 ) -
Adjusted non-interest expense (non-GAAP) C
857 $ 1,722 $ 1,709
Net interest income (GAAP) D $ 972 $ 942 $ 1,900 $ 1,890
Taxable-equivalent adjustment 13 14 25 27
Net interest income, taxable-equivalent
basis E 985 956 1,925 1,917
Non-interest income (GAAP) F 573 494 1,058 996
Significant items:
Securities (gains) losses, net (1 ) 19 (1 ) 26
Leveraged lease termination gains - - (2 ) -
Gain on sale of affordable housing
residential mortgage loans (1) - - - (8 )
Adjusted non-interest income (non-GAAP) G
513 $ 1,055 $ 1,014
Total revenue D+F=H $ 1,545 $ 1,436 $ 2,958 $ 2,886
Adjusted total revenue D+G=I $ 1,544 $ 1,455 $ 2,955 $ 2,904
Total revenue, taxable-equivalent basis E+F=J $ 1,558 $ 1,450 $ 2,983 $ 2,913
Adjusted total revenue, taxable-equivalent
basis (non-GAAP) E+G=K $ 1,557 $ 1,469 $ 2,980 $ 2,931
Efficiency ratio (GAAP) B/J 59.35 % 59.37 % 59.01 % 59.09 %
Adjusted efficiency ratio (non-GAAP) C/K 57.75 % 58.33 % 57.82 % 58.31 %
Fee income ratio (GAAP) F/J 36.78 % 34.09 % 35.48 % 34.20 %
Adjusted fee income ratio (non-GAAP) G/K 36.77 % 34.96 % 35.42 % 34.61 %
RETURN ON AVERAGE TANGIBLE COMMON
SHAREHOLDERS' EQUITY
Average shareholders' equity (GAAP) $ 17,384 $ 15,927 $ 16,922 $ 15,562
Less: Average intangible assets (GAAP) 5,373 4,933 5,159 4,937
Average deferred tax liability related to
intangibles (GAAP) (94 ) (94 ) (93 ) (94 )
Average preferred stock (GAAP) 1,409 1,154 1,360 988
Average tangible common shareholders' equity
(non-GAAP) L $ 10,696 $ 9,934 $ 10,496 $ 9,731
Return on average tangible common
shareholders' equity (non-GAAP)(2) A/L (8.90 )% 15.11 % (1.87 )% 15.58 %
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December 31,
June 30, 2020 2019
(Dollars in millions, except per
share data)
TANGIBLE COMMON RATIOS
Ending shareholders' equity (GAAP) $ 17,602 $ 16,295
Less: Ending intangible assets (GAAP) 5,330 4,950
Ending deferred tax liability related to
intangibles (GAAP) (103 ) (92 )
Ending preferred stock (GAAP) 1,656 1,310
Ending tangible common shareholders' equity
(non-GAAP) M $ 10,719 $ 10,127
Ending total assets (GAAP) $ 144,070 $ 126,240
Less: Ending intangible assets (GAAP) 5,330 4,950
Ending deferred tax liability related to
intangibles (GAAP) (103 ) (92 )
Ending tangible assets (non-GAAP) N $ 138,843 $ 121,382
End of period shares outstanding O 960 957
Tangible common shareholders' equity to tangible
assets (non-GAAP) M/N 7.72 % 8.34 %
Tangible common book value per share (non-GAAP) M/O
$ 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. 87
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OPERATING RESULTS
NET INTEREST INCOME AND MARGIN
Table 24-Consolidated Average Daily Balances and Yield/Rate Analysis
Three Months Ended June 30
2020 2019
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
(Dollars in millions; yields on taxable-equivalent basis)
Assets
Earning assets:
Debt securities (1) $ 23,828 $ 148 2.49 % $ 24,675 $ 163 2.65 %
Loans held for sale 807 6 3.06 398 4 4.14
Loans, net of unearned
income (2)(3) 91,964 911 3.96 83,905 1,006 4.79
Other earning assets 7,541 11 0.53 2,299 18 3.07
Total earning assets 124,140 1,076 3.46 111,277 1,191 4.27
Unrealized gains/(losses) on
securities available for
sale, net (1) 1,031 (136 )
Allowance for loan losses (1,860 ) (857 )
Cash and due from banks 2,070 1,857
Other non-earning assets 14,439 13,974
$ 139,820 $ 126,115
Liabilities and
Shareholders' Equity
Interest-bearing
liabilities:
Savings $ 10,152 3 0.13 $ 8,806 3 0.16
Interest-bearing checking 21,755 6 0.11 18,869 33 0.71
Money market 27,870 10 0.13 24,350 49 0.79
Time deposits 6,690 21 1.26 7,800 33 1.69
Other deposits 72 - 1.64 1,210 7 2.36
Total interest-bearing
deposits (4) 66,539 40 0.24 61,035 125 0.82
Federal funds purchased and
securities sold under
agreements to repurchase - - - 244 1 2.41
Other short-term borrowings 1,558 2 0.53 1,965 13 2.54
Long-term borrowings 7,567 49 2.56 10,855 96 3.52
Total interest-bearing
liabilities 75,664 91 0.48 74,099 235 1.27
Non-interest-bearing
deposits (4) 44,382 - - 33,883 - -
Total funding sources 120,046 91 0.30 107,982 235 0.87
Net interest spread (1) 2.98 3.00
Other liabilities 2,390 2,195
Shareholders' equity 17,384 15,927
Noncontrolling Interest - 11
$ 139,820 $ 126,115
Net interest income /margin
on a taxable-equivalent
basis (5) $ 985 3.19 % $ 956 3.45 %
_____(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
three months ended
(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 0.14% and 0.53% for the
three months ended
(5) The computation of taxable-equivalent net interest income is based on the
statutory federal income tax rate of 21% for both
adjusted for applicable state income taxes net of the related federal tax
benefit.
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Six Months Ended June 30
2020 2019
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
(Dollars in millions; yields on taxable-equivalent basis)
Assets
Earning assets:
Debt securities-taxable (1) $ 23,797 $ 306 2.57 % $ 24,685 $ 328 2.66 %
Loans held for sale 660 11 3.32 350 7 3.92
Loans, net of unearned
income (2)(3) 87,607 1,826 4.17 83,816 2,000 4.78
Other earning assets 4,921 24 0.96 2,256 40 3.60
Total earning assets 116,985 2,167 3.70 111,107 2,375 4.28
Unrealized gains (losses) on
securities available for
sale, net (1) 771 (290 )
Allowance for loan losses (1,588 ) (850 )
Cash and due from banks 1,992 1,875
Other non-earning assets 14,135 13,988
$ 132,295 $ 125,830
Liabilities and
Stockholders' Equity
Interest-bearing
liabilities:
Savings $ 9,487 7 0.15 $ 8,829 7 0.17
Interest-bearing checking 20,514 28 0.28 19,087 66 0.70
Money market 26,510 38 0.28 24,171 89 0.74
Time deposits 6,996 47 1.35 7,637 60 1.59
Other deposits 495 4 1.58 933 11 2.35
Total interest-bearing
deposits (4) 64,002 124 0.39 60,657 233 0.77
Federal funds purchased and
securities sold under
agreements to repurchase 76 1 1.39 293 3 2.41
Other short-term borrowings 1,601 9 1.13 1,851 24 2.54
Long-term borrowings 7,985 108 2.69 11,301 198 3.49
Total interest-bearing
liabilities 73,664 242 0.66 74,102 458 1.25
Non-interest-bearing
deposits (4) 39,294 - - 33,889 - -
Total funding sources 112,958 242 0.43 107,991 458 0.85
Net interest spread (1) 3.04 3.03
Other liabilities 2,415 2,272
Stockholders' equity 16,922 15,562
Noncontrolling Interest - 5
$ 132,295 $ 125,830
Net interest income and
other financing
income/margin on a
taxable-equivalent basis
(1)(5) $ 1,925 3.31 % $ 1,917 3.48 %
_____(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
six months ended
(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 0.23% and 0.50% for the six
months ended
(5) The computation of taxable-equivalent net interest income is based on the
statutory federal income tax rate of 21% for both
adjusted for applicable state income taxes net of the related federal tax
benefit.
For the second quarter of 2020, net interest income (taxable-equivalent basis)
totaled $985 million compared to $956 million in the second quarter of 2019. The
net interest margin (taxable-equivalent basis) was 3.19 percent for the second
quarter of 2020 compared to 3.45 percent for the second quarter of 2019. Net
interest income (taxable-equivalent basis) totaled $1.9 billion for the first
six months of both 2020 and 2019. Net interest margin (taxable-equivalent basis)
was 3.31 percent and 3.48 percent for the first six months of 2020 and 2019,
respectively. The quarter-over-quarter increase in net interest income was
primarily driven by increases in loan balances due to PPP lending, the Company's
equipment finance company acquisition and increased line
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utilization on commercial credit lines. Net interest income also benefited from the execution of the Company's interest rate hedging strategy. The hedges are designed to protect net interest income in a low short-term interest rate environment, such as the one that currently exists, and had a positive impact of approximately$69 million for the first six months of 2020, of which$60 million was realized in the three months endedJune 30, 2020 . The declines in net interest margin for the second quarter 2020 and the first six months of 2020, compared to the same periods in 2019, were primarily driven by elevated liquidity levels, increases in loan balances due to PPP lending, the Company's equipment finance company acquisition and increased utilization on commercial credit lines. 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 ofJune 30, 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 endingJune 2021 . The second quarter showed strong balance sheet growth, particularly in low-cost deposits and cash balances held with theFederal Reserve . These trends increase reported asset sensitivity levels; however, they are expected to normalize over time. 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. Under that environment, it is expected that declines in funding costs and increases in balance sheet hedging income will completely offset the decline in asset yields. Therefore, net interest income sensitivity to short-term rates is approximately neutral. Net interest income remains exposed to longer yield curve tenors. A reduction in intermediate and long-term interest rates (such as intermediate to longer-termU.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 and recent balance sheet growth begins to normalize. More information regarding forward starting hedges is disclosed in Table 26 and its accompanying description. 90
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Table 25-Interest Rate Sensitivity
Estimated Annual Change
in Net Interest Income
June 30, 2020 (1)(2)
(In millions)
Gradual Change in Interest Rates
+ 200 basis points $154
+ 100 basis points 94
- 100 basis points (floored)(3) (57 )
Instantaneous Change in Interest Rates
+ 200 basis points $160
+ 100 basis points 117
- 100 basis points (floored)(3) (72 )
_________
(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 27 for additional information regarding hedge start dates.
(3) The -100 basis point (floored) scenario represents a 12 month average rate
shock of -16 basis points and -64 basis points to approximately zero for 1
month LIBOR and the 10 year
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 25 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 25 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 normalization 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 environment. In the base case scenario and falling rate scenarios in Table 25, 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 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$2.5 billion over 12 months in the gradual +100 basis point scenario in Table 25. 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 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 91
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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 26-Hedging Derivatives by Interest Rate Risk Management Strategy
June 30, 2020
Weighted-Average
Notional
Amount Maturity (Years) Receive Rate(1) Pay Rate(1) Strike Price(1)
(Dollars in millions)
Derivatives in fair value hedging
relationships:
Receive fixed/pay variable swaps $ 3,100 2.9 1.7 % 0.2 % - %
Derivatives in cash flow hedging
relationships:
Receive fixed/pay variable swaps 16,000 4.8 1.9 0.2 -
Interest rate floors 6,750 4.3 - - 2.1
Total derivatives designated ashedging instruments$ 25,850 4.4 1.9 % 0.2 % 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 26 above are forward starting as ofJune 30,2020 , including$2.25 billion notional of the outstanding cash flow swaps and$2.0 billion notional of the outstanding cash flow floors. Forward starting swaps and floors have maturities of approximately five years from their respective start dates, and further information regarding the timeline for start dates has been disclosed in Table 27. 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. 92
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Table 27-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 _________
(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 25.
(2) As of
flow swaps and
rate floors are active. During the third quarter of 2020,
notional of interest rate swaps become active and
interest rate floors become active. An additional $250 million notional of
interest rate swaps become active in the fourth quarter of 2020. 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 endedDecember 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 operations. 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 9 "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, theFinancial 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, derivative products, floating-rate obligations, and other financial instruments that use LIBOR as a benchmark rate. The Company has established a LIBOR Transition Program, which includes dedicated leadership and staff, with all relevant business lines and support groups engaged. As part of this program, the Company continues to identify, assess, and monitor risks associated with the discontinuation, unavailability, or non-representativeness of LIBOR. Regions is also coordinating with regulatory agencies 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. Significant uncertainty remains; however, steps to mitigate risks associated with the transition are being overseen by Regions'Executive LIBOR Steering Committee . 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's impact to contracts and products; evaluating necessary operational and infrastructure enhancements to implement alternative benchmark rates; and coordinating communications with customers. 93
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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 theU.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. OnMarch 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 theFederal Reserve's Paycheck Protection Program Liquidity Facility. As ofJune 30, 2020 , Regions has not used the Paycheck Protection Program Liquidity Facility. Regions intends to fund its obligations primarily through cash generated from normal operations. Regions also has obligations related to potential litigation contingencies. See Note 12 "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$2.7 billion atJune 30, 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." AtJune 30, 2020 , Regions had approximately$11.5 billion in cash on deposit with the FRB, an increase from approximately$2.5 billion atDecember 31, 2019 , due to the significant increase in deposits associated with government programs offered in relation to COVID-19. Refer to the "Cash and Cash Equivalents" section for more information. 94
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Regions' borrowing availability with the FRB as ofJune 30, 2020 , based on assets pledged as collateral on that date, was$14.7 billion . Regions' financing arrangement with the FHLB adds additional flexibility in managing the Company's liquidity position. As ofJune 30, 2020 , Regions' outstanding balance of FHLB borrowings was$401 million and its total borrowing capacity from the FHLB totaled approximately$17.2 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 theSEC that can be utilized by Regions to issue various debt and/or equity securities. Additionally, Regions' Board has authorizedRegions 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 currentU.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 endedDecember 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 outsidethe 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. 95
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Regions participates in information sharing organizations such asFS-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 toFS-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 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 onJanuary 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$882 million in the second quarter of 2020 compared to the provision for loan losses of$92 million during the second quarter of 2019. The provision for credit losses totaled$1.3 billion for the first six months of 2020 compared to the provision for loan losses of$183 million during the first six months of 2019. Refer to the "Allowance for Credit Losses" section for further detail. 96
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NON-INTEREST INCOME
Table 28-Non-Interest Income
Quarter-to-Date Change
Three Months Ended June 30 6/30/2019
2020 2019 Amount Percent
(Dollars in millions)
Service charges on deposit
accounts $ 131 $ 181 $ (50 ) (27.6 )%
Card and ATM fees 101 120 (19 ) (15.8 )%
Investment management and
trust fee income 62 59 3 5.1 %
Capital markets income 95 39 56 143.6 %
Mortgage income 82 31 51 164.5 %
Investment services fee
income 17 20 (3 ) (15.0 )%
Commercial credit fee income 17 18 (1 ) (5.6 )%
Bank-owned life insurance 18 19 (1 ) (5.3 )%
Securities gains (losses),
net 1 (19 ) 20 105.3 %
Market value adjustments on
employee benefit assets -
other 16 (2 ) 18 NM
Other miscellaneous income 33 28 5 17.9 %
$ 573 $ 494 $ 79 16.0 %
Six Months Ended June 30
Year-to-Date
2020 2019 Amount Percent
(Dollars in millions)
Service charges on deposit accounts $ 309$ 356 $ (47 ) (13.2 )% Card and ATM fees 206 229 (23 ) (10.0 )% Investment management and trust fee income 124 116 8 6.9 % Capital markets income 104 81 23 28.4 % Mortgage income 150 58 92 158.6 % Investment services fee income 39 39 - - % Commercial credit fee income 35 36 (1 ) (2.8 )% Bank-owned life insurance 35 42 (7 ) (16.7 )% Securities gains (losses), net 1 (26 ) 27 (103.8 )% Market value adjustments on employee benefit assets - defined benefit - 5 (5 ) (100.0 )% Market value adjustments on employee benefit assets - other (9 ) (3 ) (6 ) (200.0 )% Other miscellaneous income 64 63 1 1.6 %$ 1,058 $ 996 $ 62 6.2 % ________ 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 decreases during the second quarter and first six months of 2020 compared to the same periods of 2019 were the result of lower customer spending due to the COVID-19 pandemic. Government stimulus programs resulting from the COVID-19 pandemic aided in the increase of customer deposits, and this elevated customer liquidity also caused a reduction in overdraft charges. If spend levels continue to persist, service charges on deposit accounts will continue to be negatively impacted for the rest of the year. See the "Second Quarter Overview" section 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 decreases in the second quarter of 2020 and first six months of 2020 compared to the same periods of 2019 were driven primarily by decreases in bank card and consumer credit card income as a result of decreased debit and credit 97
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card spend and transaction volumes associated with the COVID-19 pandemic. If spend levels continue to persist, card and ATM fees will continue to be negatively impacted for the rest of the year. See the "Second Quarter Overview" section 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 increases in the second quarter and first six months of 2020 compared to the same periods of 2019 were primarily driven by a record quarter for debt and equity underwriting and fees generated from the placement of permanent financing for real estate in the second quarter of 2020. Capital markets income was also favorably impacted by positive market-related credit valuation adjustments tied to credit derivatives within commercial swap income totaling$34 million during the second quarter of 2020, compared to negative adjustments totaling$7 million the second quarter of 2019. These valuation adjustments for the first six months of 2020 netted to virtually no impact as the negative valuation adjustments in the first quarter of 2020 recovered in the second quarter as credit spreads improved, compared to a negative adjustment of$9 million the first six months of 2019. 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 increases in mortgage income in the second quarter and first six months of 2020 compared to the same periods of 2019 were due primarily to increases in loan production and sales income as lower interest rates during the current quarter and first six months of 2020 increased loan application activity. Additionally, MSR valuation adjustments and related hedge activity positively impacted the change in mortgage income. Bank-owned life insurance-Bank-owned life insurance decreased in the first six months 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. 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. Changes to market valuation adjustments in 2020 compared to 2019 are driven by the overall performance of the equity markets. The decrease in market valuation adjustments for the first six months of 2020 compared to 2019 is due to a decline in the equity markets in the first quarter of 2020. The markets somewhat recovered during the second quarter of 2020, leading to an increase compared to the second quarter of 2019. 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. AtJune 30, 2020 , the Company's recorded investment in approximately 1,100,000 common shares of nCino Inc. was approximately$24 million . OnJuly 14, 2020 , nCino executed an initial public offering. However, the Company is subject to a conventional post-issuance 180 day lock-up period, which prevents the sale of its position. Realized and unrealized gains and losses will be recognized within other miscellaneous income. 98
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NON-INTEREST EXPENSE
Table 29-Non-Interest Expense
Quarter-to-Date Change
Three Months Ended June 30 6/30/2019
2020 2019 Amount Percent
(Dollars in millions)
Salaries and employee
benefits $ 527 $ 469 $ 58 12.4 %
Net occupancy expense 76 80 (4 ) (5.0 )%
Furniture and equipment
expense 86 84 2 2.4 %
Outside services 44 52 (8 ) (15.4 )%
Professional, legal and
regulatory expenses 28 26 2 7.7 %
Marketing 22 23 (1 ) (4.3 )%
FDIC insurance assessments 15 12 3 25.0 %
Credit/checkcard expenses 12 18 (6 ) (33.3 )%
Branch consolidation,
property and equipment
charges 10 2 8 400.0 %
Visa class B shares expense 9 3 6 200.0 %
Loss on early extinguishment
of debt 6 - 6 NM
Other miscellaneous expenses 89 92 (3 ) (3.3 )%
$ 924 $ 861 $ 63 7.3 %
Six Months Ended June 30
Year-to-Date
2020 2019 Amount Percent
(Dollars in millions)
Salaries and employee benefits$ 994 $ 947 $ 47 5.0 % Net occupancy expense 155 162 (7 ) (4.3 )% Furniture and equipment expense 169 160 9 5.6 % Outside services 89 97 (8 ) (8.2 )% Professional, legal and regulatory expenses 46 46 - - % Marketing 46 46 - - % FDIC insurance assessments 26 25 1 4.0 % Credit/checkcard expenses 25 34 (9 ) (26.5 )% Branch consolidation, property and equipment charges 21 8 13 162.5 % Visa class B shares expense 13 7 6 85.7 % Provision (credit) for unfunded credit losses(1) - (1 ) 1 100.0 % Loss on early extinguishment of debt 6 - 6 NM Other miscellaneous expenses 170 190 (20 ) (10.5 )%$ 1,760 $ 1,721 $ 39 2.3 % ________ NM - Not Meaningful (1) Upon adoption of CECL onJanuary 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 increased during the second quarter and the first six months of 2020 compared to the same periods in 2019, driven primarily by higher production-based incentives, increased pay related to the COVID-19 pandemic, and annual merit raises that occurred in the second quarter of 2020. In addition, full-time equivalent headcount increased to 20,073 atJune 30, 2020 from 19,765 atJune 30, 2019 , primarily due to the additional associates from theAscentium acquisition. 99
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Net occupancy expense-Net occupancy expense includes rent, depreciation, ad valorem taxes, utilities, insurance, and maintenance. Net occupancy expense decreased in the first six months of 2020 compared to the same period in 2019 primarily due to lower maintenance expenses resulting from the shelter in place orders during the COVID-19 pandemic. 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 six months of 2020 compared to the same period in 2019 primarily due to increases in rental expenses and maintenance and repairs related to investments in technology. Outside Services-Outside services consists of expenses related to routine services provided by third parties, such as contract labor, servicing costs, data processing, loan pricing and research, data license purchases, data subscriptions, and check printing. Outside services decreased during the second quarter and the first six months of 2020 compared to the same periods in 2019 due to Regions exiting a third party lending relationship in late 2019, combined with decreases in other outside services. Credit/checkcard expenses-Credit/checkcard expenses include credit and checkcard fraud and expenses. Credit/checkcard expenses decreased during the second quarter and first six months of 2020 compared to the same periods in 2019 primarily due to a decline in checkcard fraud. 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.Visa class B shares expense-Visa class B shares expense is associated with shares sold in a prior year. TheVisa class B shares have restrictions tied to the finalization of certain covered litigation.Visa class B shares expense increased in both the second quarter and first six months of 2020 compared to the same periods in 2019 as a result of increases inVisa's stock price. Loss on early extinguishment of debt-During the second quarter of 2020, Regions executed the partial debt extinguishment of two senior bank notes and early terminations of FHLB advances, incurring related early extinguishment pre-tax charges totaling$6 million . See the "Long-Term Borrowings" section for additional information. 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 six months 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 benefit from continuing operations for the three months endedJune 30, 2020 was$47 million compared to income tax expense of$93 million for the three months endedJune 30, 2019 , resulting in effective tax rates of 18.3 percent and 19.4 percent, respectively. The income tax benefit for the six months endedJune 30, 2020 was$5 million compared to income tax expense of$198 million for the six months endedJune 30, 2019 , resulting in effective tax rates of 10.1 percent and 20.2 percent, respectively. The effective tax rates are lower in both current year periods due primarily to a consistent level of permanent income tax preferences having a proportionally larger impact relative to pre-tax earnings, which were negatively impacted in the current year because of the COVID-19 pandemic. Many factors impact the effective tax rate including, but not limited to, the level of pre-tax income (loss), the mix of income (loss) 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. OnJanuary 1, 2020 , the Company adopted CECL. This resulted in 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. AtJune 30, 2020 , the Company reported a net deferred tax liability of$538 million compared to a net deferred tax liability of$328 million atDecember 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. ASCENTIUM ACQUISITION OnApril 1, 2020 , Regions completed its acquisition of an equipment finance companyAscentium Capital, LLC . The acquisition gives Regions the ability to increase business loans and leases to small business customers usingAscentium's tech-enabled same-day credit decision and funding capabilities. 100
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As a result of the acquisition Regions recorded approximately$2.4 billion of assets and assumed$1.9 billion of liabilities. Of the total assets acquired,$1.9 billion were loans and leases that are included in Regions' commercial and industrial loan portfolio. Of the liabilities assumed,$1.8 billion were long-term borrowings. Regions subsequently paid down a significant portion of the borrowings, as discussed below. Assets acquired and liabilities assumed were recorded at estimated fair value. These fair value estimates are considered preliminary as ofJune 30, 2020 . Fair value estimates, including loans, intangible assets and goodwill, are subject to change for up to one year after the acquisition date as additional information becomes available. Of the loans acquired, a portion were determined to be credit deteriorated on the date of purchase. Purchased loans that have experienced a more than insignificant deterioration in credit quality since origination are considered to be credit deteriorated. PCD loans are initially recorded at purchase price less the ALLL recognized at acquisition. Subsequent credit loss activity is recorded within the provision for credit losses. Regions recorded PCD loans of$873 million as a result of the acquisition, which was reflective of a purchase discount as the Company is not expected to collect the contractual cash flows of the loans. Regions recorded an ALLL related to these loans of$60 million , which was included in the total acquired asset value as part of the acquisition. The non-credit discount related toAscentium's PCD loans and the fair value mark on non-PCD loans will be amortized to interest income over the contractual life of the loan using the effective interest method. The amortization will not be material. In conjunction with the acquisition, Regions recognized goodwill of$348 million and other intangible assets of$47 million . Intangible assets are comprised of trademarks, customer lists and other intangibles. Intangible assets will be amortized over the expected useful life of each recognized asset. Subsequent to the acquisition, Regions paid down a significant portion of the long-term borrowings, and as ofJune 30, 2020 ,$459 million of long-term debt remained, which is associated with three securitizations. The securitization debt has various classes and associated maturity dates and has an effective interest rate of 2.25%. The Company will manage these securitized borrowings within its broader liability management process and in line with the allowable terms of the contracts. Item 3. Quantitative and Qualitative Disclosures about Market Risk Reference is made to pages 92 through 96 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 endedJune 30, 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. 101
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