I R E G O N S 2 0 1 1 A N N U A L R E P O R T T O S H A R E H O L D E R S 2011 ANNUAL REPORT TO SHAREHOLDERS FOR MORE INFORMATION Regions Financial Corporation Investor Relations 1900 Fifth Avenue North Birmingham, AL 35203 regions.com M. List Underwood Jr. Director of Investor Relations (205) 801-0265 Dana W. Nolan Associate Director of Investor Relations (205) 326-4803 Helen S. Johnson Shareholder Services Manager (205) 326-5807 The paper used to create this publication follows the guidelines of the Forest Stewardship Council™. The FSC® standard for environmental responsibility in forest management is recognized around the world. This paper contains at least 10% post-consumer waste. DEAR FELLOW SHAREHOLDERS, Although 2011 was clearly a diffi cult year given the slow pace of economic recovery in the United States and the volatility in the markets, on a continuing operations basis we continued to make steady – albeit incremental – progress on a number of key fronts. Even though we experienced a net loss available to common shareholders of $429 million, our core franchise has strengthened and we achieved sustainable profi tability from our continuing operations, excluding goodwill impairment, with net income1 of $211 million or $0.17 per share in 2011. While there is still work ahead, these results demonstrate that we are successfully executing our business plan, and I believe that we are well positioned to capitalize on future opportunities. Amid the sustained challenging economic en- vironment and market turmoil, our associates have done an excellent job staying focused on what we can control. We recognize the realities that come with regulatory reform and are mak- ing the necessary adjustments to our evolving business model. It is important to note that the Southeast, where our franchise is primarily lo- cated, is projected to outpace the national av- erage in growth over the next few years. I am confi dent our efforts will continue to produce re- sults, given our brand favorability in the markets we serve, our relentless focus on our custom- ers and our commitment to delivering value and outstanding service quality. ECONOMIC AND REGULATORY ENVIRONMENT Fragile National Economy. Without a doubt, we have been operating in a very fragile U.S. economy, marked by extremely high levels of unemployment as well as a substantial decline in home prices. Gross domestic product (GDP) growth for 2011 slowed to 1.7%. While the un- employment rate in December 2011 declined to 8.5%, it has been 9% or higher in 28 of the past 31 months. There are more than 13 million Americans still unemployed and approximately another 9 million working part-time. Almost 43% of those unemployed have been out of work for more than six months. If we are to see sustained economic recovery, the labor market needs to add about 125,000 jobs per month just to keep the unemployment rate steady. Amid the sustained challenging economic environment and market turmoil, our associates have done an excellent job staying focused on what we can control. Another factor in our fragile national economy is declining home prices. This decline is in stark contrast to the yearly increases we saw in home values following World War II when home owner- ship became part of the American dream. Prior to 2006, many Americans lived that dream and placed sizeable portions of their wealth in their homes. In spite of the current decline in home prices, 65% of Americans own a home, while just 57% of French and 46% of Germans are homeowners. That statistic becomes even more meaningful when you consider that America’s recession has wiped out more than $6 trillion in housing wealth since it began in late 2006. As a result, today one of every four homeowners owes more on their mortgage than their home is worth. 1 Non-GAAP, see Form 10-K Table 2 for GAAP to non-GAAP reconciliation 40759_Text.indd a1 40759_Text.indd a1 3/2/12 9:19 AM 3/2/12 9:19 AM Global deleveraging is also impacting the recov- ery – driven by the intense debate about how to cut the federal defi cit and the sovereign debt crisis in Europe. Both issues have created a per- vasive lack of confi dence that has resulted in in- vestors taking fewer risks, causing a major stock market sell-off and widening credit spreads. Consumers are also taking fewer risks as they continue to save more and spend less. To sum up how much has changed in the U.S. econ- omy, 6.3% of our GDP came from residential construction in the fourth quarter of 2005, while only 2.2% came from this component in 2011. Regional Economic Strengths. Despite the overall environment, the regional economic outlook for our 16-state franchise gives us rea- son to be cautiously optimistic. Our footprint includes some of the most attractive markets in the Southeast, and while these markets still face the same prolonged challenges of high unemployment and housing devaluations, we believe long-term prospects are very good. Population growth throughout our footprint – a primary driver of sustainable economic growth – is projected to be 4.2% between now and 2015, approximately 10% greater than the national projection. We believe this anticipated longer- term growth in our footprint will provide a tail- wind as we expand the number of customers we serve in our existing markets, which in turn can ultimately increase profi tability for Regions. One example of the type of opportunity we see is in Nashville, one of the largest healthcare cen- ters in America and home to Regions’ Health- care Specialty Banking Group. While the bulk of the healthcare business is in our Nashville market, there is tremendous opportunity with this growing segment throughout most of our Southeastern footprint. In the last two years alone, we have closed over $1 billion in new loan commitments and have grown outstand- ing loan balances to more than $750 million. Overall, spending on healthcare is anticipated to grow by 5.8% per year between 2010 and 2020 as baby boomers start to retire. Another example is in Mississippi, where high- tech manufacturing and ship building industries added 4,000 new jobs last year. Throughout our Southwest region, which includes Texas, Arkan- sas, Mississippi and Louisiana, there are about 30 million acres of agricultural opportunities. Regions currently banks 5% of that acreage, and we see tremendous potential to carefully expand those relationships due to our long history and expertise in the agricultural market. Commodi- ties are produced throughout the Southwest, which gives Regions a prudent way to benefi t from the global demand for commodities. 2 REGIONS 2011 ANNUAL REPORT 40759_Text.indd a2 40759_Text.indd a2 3/2/12 9:19 AM 3/2/12 9:19 AM Increased Regulatory Oversight. Over the past few years, the fi nancial services sector has seen a signifi cant increase in regulatory oversight, which will continue to impact a couple of critical areas for banks: capital and liquidity require- ments, and the ability to generate revenue. enhancements or expense cuts. We have been in a “free banking” environment for almost two decades, which is unique in a retail business, and it’s clear that changes must be made. The burden is on us to create value for which cus- tomers are willing to pay a fair price. Regarding the fi rst area, it is clear that fi nan- cial institutions will be required to hold more capital and maintain higher liquidity than they have in the past. Stress tests and in-depth capital planning reviews are now a standard part of the regulatory methodology. In 2010, a new set of regulatory standards called Basel III was proposed to increase the quantity and quality of bank capital. The Basel III directives will re- quire banks to hold high-quality capital equal to 7% of their risk-weighted assets plus additional buffers that will vary by size and complexity of the institution. Moreover, in January 2012, the Federal Reserve began conducting what will be an annual assessment called the Comprehen- sive Capital Analysis and Review, or CCAR. This review requires U.S. banks to demonstrate they have the capital levels to withstand losses and to meet the Basel III standards. Basel III also intro- duced new liquidity requirements for fi nancial institutions, calling for a liquidity coverage ratio that will prohibit banks’ reliance on short-term funding sources. While these standards are not fi nal, our estimated Basel III Tier 1 common and Tier 1 capital ratios1 are above the respective 7% and 8.5% minimums, based on our current understanding of these guidelines. On the revenue side, the Durbin Amendment, which went into effect in late 2011, will reduce debit interchange revenue by approximately 50%, or $12 billion, for the industry annually. This revenue loss from the industry will have to be recovered in some manner as the indus- try moves forward, either through revenue We’re focused on delivering a wide range of products and services that meet customer needs and offering them at a fair price. Regions’ value proposition includes giving cus- tomers choices in how and where they bank – whether at a branch, an ATM, over the phone or online. Value also means operating with integrity and providing the expertise and personal service that each customer deserves. We’re focused on delivering a wide range of products and services that meet customer needs and offering them at a fair price. We have changed the economics of how we offer the traditional bank checking account, and with that change we have moved to a better business model where customers can more fully understand the costs of our ser- vices and more easily determine the value they receive from a relationship with Regions. CLEARLY DEFINED STRATEGIC PRIORITIES Navigating through this environment and the way it changes our business requires that all of our 23,707 bank associates understand our business plan so they can execute it. To that end, we have clearly identifi ed four strategic priorities: • Strengthen Financial Performance • Focus on the Customer • Enhance Risk Management • Build the Best Team 1 Non-GAAP, see Form 10-K Table 2 for GAAP to non-GAAP reconciliation REGIONS 2011 ANNUAL REPORT 3 40759_Text.indd a3 40759_Text.indd a3 3/2/12 9:19 AM 3/2/12 9:19 AM Focus on the Customer Build the Best Team Strengthen Financial Performance Enhance Risk Management Manage Performance Each of these priorities includes a plan to mea- sure performance – this is an integral part of our corporate culture and key to our future growth. We believe teams perform best when all players understand their roles and have accountabil- ity for what they accomplish both individually and collectively. Strengthen Financial Performance Our 2011 results refl ected our priority of strength- ening fi nancial performance. Adjusted pre-tax pre-provision income2, or PPI, totaled $1.9 bil- lion, excluding securities transactions, leveraged lease terminations, branch consolidation costs and other property charges and goodwill impair- ment. This is an increase of 11% compared to the prior year. Our associates delivered these results and many more during a year where headwinds challenged the way we operate and the banking environment continued to evolve. Strong Low Cost Deposit Growth. Our strategy to lower deposit costs while remaining competi- tive and improve funding mix produced solid results for the year, as deposit costs declined 29 basis points relative to our peers, which on average declined only 21 basis points. Average low cost deposits grew 6% for the year, refl ect- ing our ability to signifi cantly re-price maturing certifi cates of deposits. As a result, funding costs were further reduced by a favorable shift in our deposit mix. Given the signifi cant amount of certifi cates of deposit maturing in 2012, we see additional opportunities next year. Low Cost Deposits / Deposit Costs* 71,813 76,244 1.91% 58,425 67,125 1.35% 0.78% 2008 2009 2010 *From continuing operations 0.49% 2011 We were pleased to see our deposit strategy was validated by the FDIC’s annual market share report, which showed that even as we reduced interest rates on deposits, Regions maintained a No. 1 market share position in Alabama, Ten- nessee and Mississippi and also maintained a position of fourth or better in Florida, Arkansas and Louisiana. Improved Credit Quality. Our provision for credit losses was 47% lower in 2011 than 2010, and we saw continued improvement in our credit quality trends. Although our non-performing assets remain high at $3 billion, they did de- cline 24% in 2011. Other credit metrics also showed improvement during the year as our business services criticized loans, which are our earliest indicators of problem loans, de- clined 35%, early and late stage delinquen- cies declined 24%, and net loan charge-offs decreased 29%. Furthermore, our allowance for loan losses remains strong at $2.7 billion, or 3.54% of total loans. While our improvement in credit quality will generally track the economic 2 Non-GAAP, see Form 8-K Exhibit 99.2 page 10 for GAAP to non-GAAP reconciliation 4 REGIONS 2011 ANNUAL REPORT 40759_Text.indd a4 40759_Text.indd a4 3/6/12 12:45 PM 3/6/12 12:45 PM recovery, which has been slower than we would have liked, we do expect credit costs to con- tinue their downward trend into 2012. Loan Growth. Refl ecting both consumers’ and business owners’ lack of confi dence in our na- tion’s economic recovery, overall loan demand remains weak. In the last fi ve years, consumer home equity loan applications have declined 75%, while loan approvals have remained steady. Businesses and consumers who are not confi dent in the economic outlook simply will not take on the risk of additional debt if they can avoid it. In spite of this environment, Regions extended $60 billion in new credit in 2011 and $185 bil- lion since 2009. Our loan production included $51 billion of business loans, of which $15 bil- lion were new commitments. Our consumer loan production totaled $9 billion, a 16% de- cline over 2010. Capital and Liquidity Strength. Regions’ capi- tal levels – a key measure of a bank’s fi nancial strength – are strong, and we are confi dent they will remain so even as tougher capital stan- dards are imposed. Clearly, the de-risking of our portfolio over the last three years has paid tremendous dividends in terms of enhancing our portfolio. At December 31, 2011, our capital levels also exceeded Basel III requirements, with a Tier 1 ratio standing at 11.4% and a Tier 1 common1 ratio totaling 7.7%. Since the end of 2010, our Tier 1 common1 capital increased 66 basis points to end the year at 8.5%. Liquidity at both the bank and the holding company remains solid. We are primarily core funded and have a loan to deposit ratio of 81%. Cash at the par- ent holding company totaled $2.5 billion and is above our policy minimums of maintaining a suffi cient level of funding to meet projected cash needs, which include all debt service, dividends and maturities for the next two years. Businesses and consumers who are not confi dent in the economic outlook simply will not take on the risk of additional debt if they can avoid it. Tier 1 Common1 Ratio We also made the strategic decision to re-enter the credit card business for consumers and small businesses as part of our effort to further diversify our revenue streams and better serve our customers. In just six months, we increased our account production by 5% and generated $1.1 billion in outstanding loans on the balance sheet and an additional $6.7 billion in available credit for our customers. In addition, consistent with our strategy of expanding our loan product offerings to meet consumer demand and mar- ket conditions, we also re-entered the indirect auto lending business, which generated $1 bil- lion in volume for the year. This was one of the primary drivers of total consumer loan volume, which increased 36% in 2011. 2008 2009 2010 2011 6.57 % 7.15 % 7.85 % 8.51% As part of our process to evaluate how to best manage our capital and increase shareholder value, in January of this year we announced that we entered into a stock purchase agreement to sell Morgan Keegan & Company, Inc. and related affi liates to Raymond James Financial Inc., for $930 million. As part of the transaction, Morgan Keegan is expected to pay Regions a dividend of $250 million before closing, pending regulatory approval, resulting in total proceeds of approximately $1.18 billion to Regions. 1 Non-GAAP, see Form 10-K Table 2 for GAAP to non-GAAP reconciliation REGIONS 2011 ANNUAL REPORT 5 40759_Text.indd a5 40759_Text.indd a5 3/6/12 12:46 PM 3/6/12 12:46 PM Importantly, this transaction reduces our over- all risk profi le, enhances liquidity and improves Regions’ capital ratios while reducing our ex- pense base and enhancing our focus on our core banking business. Because we retained our asset management and trust businesses, we remain well positioned to continue serving the wealth management needs of our customers. This trans- action establishes an on-going relationship with Raymond James, further enhancing our ability to serve our existing customers. We also ex- pect that we will maintain important business relationships with Morgan Keegan associates that were developed over many years of working together to serve our customers’ needs. This transaction, along with achieving continued, sustainable profi tability and demonstrating a material improvement in our credit quality, are all key steps toward the eventual repayment of the government’s investment in Regions. We believe we have made tremendous progress in these regards, but we remain prudent and want to pay back the government’s investment from a place of strength and in as shareholder-friendly manner as possible. Net Interest Margin* 2008 2009 2010 2011 *From continuing operations 3.23 % 2.68% 2.91% 3.07% Margin Improvement. This prolonged environ- ment of low interest rates that we are currently operating in has continued to put strains on net interest income and the resulting net interest margin. While we have been able to generate low cost deposit growth and thus reduce deposit costs to 49 basis points, low loan demand has put stress on our loan yield. Net interest income for the year was $3.4 billion, or 0.6% higher than 2010. However, net interest margin for the full year was 3.07%, a 16 basis point improve- ment from the previous year. We continue to forecast that interest rates will remain low through 2012 and barring any un- expected movement in interest rates, we ex- pect net interest margin to grow modestly over the balance of 2012, primarily due to high yielding CD maturities. Growing Non-Interest Revenue in a Challeng- ing Environment. Non-interest revenue, which is primarily made up of service charges and interchange fees, was a particular focus in 2011. With the new restrictions recently im- posed, the ability to grow fee-based revenues has proven to be a critical aspect of our strat- egy. New products and services not only allow us to meet evolving customer needs, but also to diversify and grow dependable revenue streams. Our service charges remained steady in 2011, while most of our industry saw declines. Contrib- uting to this was our restructuring of checking accounts to fee-eligible, which was a necessity to offset lower interchange income. While we have seen an increase in the volume of transac- tions due to the number of new accounts that we opened, total spending among consumers has decreased due to the sluggish economy. In ad- dition, over the last two years we have seen our second and third best years in mortgage income and production. 6 REGIONS 2011 ANNUAL REPORT 40759_Text.indd a6 40759_Text.indd a6 3/6/12 12:46 PM 3/6/12 12:46 PM Service Charges* Growth in 2011 vs. Peers -4% -5% -6% -6% -7% -7% -7% 0% Bank 1 -1% Regions Bank 3 Bank 4 Bank 5 Bank 6 Bank 7 Bank 8 Bank 9 Bank 10 Bank 11 -10% -13% Expense* Reduction in 2011 vs. Peers -8% -5% -2% -2% Bank 1 Regions Bank 3 Bank 4 Bank 5 Bank 6 Bank 7 Bank 8 Bank 9 Bank 10 Bank 11 3% 3% 5% 6% 8% 8% 25% *From continuing operations Expense Control. We understand that tightly controlling expenses during a slow economy is critical, and Regions remains focused on taking steps to improve productivity and effi ciency. We are fundamentally changing our cost culture by continuously seeking opportunities to improve and control our expense base, while still mak- ing the appropriate investments to enhance our competitive position and remain a superior service provider. Non-interest expenses totaled $3.9 billion in 2011; however, non-interest expenses from continuing operations3, exclud- ing the goodwill impairment and regulatory charge, were $3.6 billion, 5% lower than the prior year. Regions reduced expenses in 2011 year-over-year faster than almost all of our peers, and we’ve accomplished that by contain- ing credit costs, salaries and expenses. Even as the economy shows signs of improvement, we will continue to control expenses and fi nd more effi cient ways to operate. Focus On The Customer Keeping customers at the center of every busi- ness decision is what we do each day. We are focused on building deep and long-term rela- tionships and are committed to being a trusted fi nancial advisor to our customers. Our high loyalty and satisfaction scores come from a deliberate and disciplined effort to drive a ser- vice culture in the company. As a customer- centric organization, we continuously seek feedback on the service our customers receive and, based on that feedback, make adjust- ments to enhance service quality and ensure our associates are providing the very best banking experience. A Better Banking Experience. We fi nd it very encouraging that in 2011 – at a time when many seemed negative toward banks as a result of the economic downturn – Regions’ customer sat- isfaction and loyalty scores were at an all-time high. We consistently achieved top rankings in customer experience and brand loyalty: • J.D. Power ranked Regions highest in retail banking satisfaction in Florida • Regions ranked among the top 12 banks for retail banking satisfaction in all fi ve of J.D. Power’s geographic regions that correspond with our footprint • J.D. Power ranked Regions at or above the industry average in every component of the study, which also highlights above-average improvement in all our delivery channels – 3 Non-GAAP, see Form 10-K Table 6 for GAAP to non-GAAP reconciliation REGIONS 2011 ANNUAL REPORT 7 40759_Text.indd a7 40759_Text.indd a7 3/6/12 12:46 PM 3/6/12 12:46 PM in person, online, at ATMs and over the phone • Greenwich Associates gave Regions its Excel- lence Award for Small Business and Middle Market Banking • Temkin Group ranked Regions as the top bank for customer experience and one of the top companies in America for customer service across all industries The key to our success in delivering a better banking experience is how we focus on meet- ing customer needs – not on selling products. Recognizing that every customer has unique fi - nancial needs, our bankers develop a thorough understanding of a customer’s goals and then recommend the right products and services for them that will help them succeed. The key to our success in delivering a better banking experience is how we focus on meeting customer needs – not on selling products. New Products and Technology Designed To De- liver Value. Regulatory reform changed the way banks generate revenue, which in turn impact- ed product design and pricing, with the most signifi cant change being that the industry would now charge for products and services that were once free. With this paradigm shift, Regions took a deliberate and proactive approach in product development so customers would see the value in a banking relationship with Regions. Our Now Banking suite of products is a good example of an innovative solution for consumers who want greater control and take a “pay as you go” approach to fi nancial management. With en- hanced check cashing, a reloadable Visa® pre- paid card, and money transfer and bill payment services, consumers have the increased fl exibil- ity to manage their fi nances the way they prefer. Further supporting our efforts to improve the customer experience, Regions invested in new technology last year designed to improve our effi ciency and effectiveness in serving our cus- tomers. The new system combined fi ve systems into one, allowing the teller to see a customer’s entire relationship with Regions, from a mort- gage to a credit card or a business loan. This technology gives us the ability to sell products that customers need, which in turn improves our bottom line. It also enhances our risk man- agement practices by allowing a manager to de- termine the appropriate level of credit to extend and the types of products to recommend. Serving the Unique Needs of Affl uent Clients. In 2011, Regions announced the formation of the Wealth Management line of business to serve the unique needs of our affl uent client segment, which is strategically important to our future growth. Based on market research, we determined that the size of the affl uent markets in our branch network represents a signifi cant opportunity to deepen existing relationships and to obtain more market share throughout the footprint. To capture this opportunity, we have brought together Private Banking, Personal Trust, Institutional Trust and Insurance under the Wealth Management umbrella, creating a structure that enables us to take a holistic ap- proach to serving our clients. Wealth Manage- ment will build on Regions’ strengths by being a trusted advisor to our clients, providing excep- tional service quality and delivering value. Financial Education. We believe there is a shared responsibility between customers and banks to avoid another fi nancial crisis – and at the core is ensuring that customers under- stand basic fi nancial management. As part of our commitment to help customers make sound decisions, Regions partners with the Financial Services Roundtable to deliver fi nancial educa- tion to high school students. The program is a partnership with the EverFi Financial Literacy 8 REGIONS 2011 ANNUAL REPORT 40759_Text.indd a8 40759_Text.indd a8 3/2/12 9:19 AM 3/2/12 9:19 AM Platform, a web-based curriculum that teaches, assesses and certifi es students in hundreds of fi nancial topics. One of the best examples of this partnership came during the 2010 – 2011 school year, as our associates helped bring to life a fi nancial education program for 14 high school classrooms in Atlanta, Georgia. With our support, these schools adopted the EverFi Financial Education Program and more than 1,000 graduates obtained a solid foundation of personal fi nance and money management skills. With a goal of supporting fi nancial stabilization throughout the communities we serve, we all need to be proactive and we take our role seriously in doing our part to ensure that history doesn’t repeat itself. We understand that a lack of knowledge of ba- sic fi nancial management played a role in the economic crisis several years ago. With a goal of supporting fi nancial stabilization throughout the communities we serve, we all need to be proac- tive and we take our role seriously in doing our part to ensure that history doesn’t repeat itself. Loyalty Drives Performance. Regions’ loyalty scores are in the top 10%, which is a marked im- provement to the average score we had in 2008. We’ve invested time and resources to under- stand the correlation between loyal customers and higher loan and deposit balances – and no- tably, there is a clear correlation. We learned that loyal customers have on average $1,000 more in deposit balances versus non-loyal customers. For loan balances, loyal customers have $1,900 more versus non-loyal customers. Furthermore, over an 18 month period, loyal customers in- crease their deposit balances by $2,500 versus non-loyal; and loyal customers increase their loan balances by $3,000 versus non-loyal cus- tomers. We’re not being complacent because of these results and will continue to fi nd ways to raise the bar on service excellence. Relationship managers in our Business Ser- vices Group are committed to delivering clients a world-class experience by focusing on three basic tenets: • Understanding our clients’ industries, opera- tions, fi nances, expectations and needs • Interacting effectively with our clients on a consistent basis • Serving as strategic advisors who are valued by our clients According to a survey of our business clients, this focus has resulted in clients who are com- mitted to keeping their banking relationship with Regions. On average, the business clients who report having a committed relationship with us hold an average of 30% – 50% more in deposits and loans with us. The Business Services Group built sustain- able performance in 2011 by leveraging our core strength in the small business and middle market segments. Small business, for example, experienced interest free deposit growth of 13% in 2011. Commercial Loan Growth Since 2009 vs. Peers Bank 1 Regions Bank 3 Bank 4 Bank 5 Bank 6 Bank 7 Bank 8 Bank 9 Bank 10 Bank 11 -2.3% 35.0% 24.2% 22.7% 16.1% 15.7% 13.8% 12.8% 11.7% 5.3% 3.6% REGIONS 2011 ANNUAL REPORT 9 40759_Text.indd a9 40759_Text.indd a9 3/6/12 12:47 PM 3/6/12 12:47 PM Our Commercial and Industrial segment fi n- ished the year with loan balances up $2 billion for 2011. Throughout the year, we continued building out our specialty lending groups – like Healthcare, Technology and Defense, and En- ergy, which produced more than $2.6 billion in loans outstanding. Diversifying revenue streams and improving client profi tability are critical to strengthening our fi nancial performance. And by delivering all Regions has to offer to our business clients, getting paid an acceptable return for our credit risk, and exiting unprofi table relationships, we will expect to deliver improved results. Fair and Responsible Banking. We see a com- mitment to fair and responsible banking as an important part of our dedication to providing the very best customer service. Beyond complying with fair lending laws, our obligation to serve our customers as a fair and responsible bank- ing partner is rooted in our values, our trust and integrity, and our business strategy. Acting responsibly is not new. Regions associ- ates have always been committed to doing what is right, and it’s about much more than comply- ing with policies. We have enhanced our tradi- tional fair lending practices, such as judgmen- tal underwriting and discretionary pricing, to encompass the entire loan life cycle, including servicing and collections. We have implemented a robust fair and responsible lending program that will improve transparency in our lending policies and practices, as well as educating all associates so that fair lending is an ingrained part of how we do business every day. We intend to be an industry leader in this area by offering quality products at a fair price, by treat- ing customers consistently at every phase of the lending process, by keeping customers informed about their banking options and by helping economically challenged communities thrive. Providing consistently good service to all custom- ers and strengthening our focus on fair and responsible banking practices is not only good for business, but also the right thing to do for customers and communities. Enhance Risk Management In 2011, we increased resources and oversight to ensure we have the right core enterprise risk management system in place. While there is cost associated in building this type of comprehen- sive infrastructure, the result of our investment will create a long-term benefi t for shareholders. We consider this initiative to be the responsibility of all our associates each and every day. As part of our effort to improve risk and qual- ity control measures, we moved all underwrit- ing functions in Business Banking, Community Banking and Private Banking to the Risk Man- agement Group. We believe this structure will create consistency and streamline processes so that we clearly understand, mitigate and document the risk associated with our credit relationships. In addition, realigning the credit functions within Risk Management will allow our geography associates to provide increased fo- cus on client acquisition, expansion and reten- tion activities. To date, we’ve helped more than 42,000 people stay in their homes, and our foreclosure rate is less than half the national average. Customer Assistance – in Good Times and Bad. Credit quality plays a big role in risk manage- ment, and we believe there should be a shared responsibility between Regions and our cus- tomers when they face tough times and have trouble making their loan payment. That’s why we are proactive about working with customers 10 REGIONS 2011 ANNUAL REPORT 40759_Text.indd a10 40759_Text.indd a10 3/2/12 9:19 AM 3/2/12 9:19 AM who are in distress. We want to do our part so they can keep their homes, their cars and their businesses. Shared responsibility means edu- cating customers, helping them take ownership of their dreams and helping them fi nd a solution when times are tough. Our Customer Assistance Program, which was started in 2007, is a great example of how we work with customers to bridge them to better times. To date, we’ve helped more than 42,000 people stay in their homes, and our foreclosure rate is less than half the national average. The guiding principles of this program are to: • Focus on long-term solutions • Balance bank interests and customer needs • Communicate proactively • Educate customers and communities • Provide a quick and simple workout process Building the Best Team Standing at the foundation of all we do is our talented team of associates, and we are com- mitted to ensuring that we retain our best talent while also recruiting new talent. Like our other strategic priorities, we manage performance to ensure we are maximizing our potential indi- vidually and as a team. We are committed to fostering an environment where associates can make a positive difference, grow professionally and achieve success. Simply stated, we want to build the best team in the industry by executing a comprehensive, integrated approach to organizational develop- ment with a focus on our fi ve corporate values: • Do What is Right • Put People First • Reach Higher • Focus on Your Customer • Enjoy Life This approach includes a thorough review of everything from recruiting practices to associ- ate retention, from leadership development to performance management. We want to ensure we provide associates the kind of opportunity that allows them to come to work with a sense of purpose and go home with a sense of pride every day. 64% of Regions associates own Regions stock. Regions associates participated in 906,368 hours of training in 2011. In our leadership development programs, we stress the importance of collaboration, integrity and accountability. Our managers ensure their teams have clear goals established and that they provide feedback regularly – not just once a year in formal reviews. Excellent teams are built when team members clearly understand their roles and how their contribution infl uences success. I believe our commitment to our values and to our associates helped guide us through a challenging economy, and we are confi dent this same com- mitment will be key to our success in the future. LOOKING AHEAD The overall consensus for 2012 from econo- mists is for marginally better but still below-trend economic growth (GDP growth between 2% and 3%). The unemployment rate is projected to remain near 9% for most of the year. Hous- ing starts are expected to total approximately 700,000, or 100,000 more than in 2011, but only about one-third of the peak of 2.1 million units witnessed in 2005. Infl ation is projected at just over 2% for 2012. As we look ahead to 2012, we recognize that we still face challenges – both with respect to REGIONS 2011 ANNUAL REPORT 11 40759_Text.indd a11 40759_Text.indd a11 3/2/12 9:19 AM 3/2/12 9:19 AM the economy and the resulting banking envi- ronment. With this backdrop, we will remain intensely focused on executing our business plan and on the areas we can control. We are confi dent that we can deliver continued im- provement in our operating results and build long-term shareholder value – a belief that is built upon just how far Regions has come in the past few years in spite of the market turmoil. Looking at a few key metrics, we: • Reduced our Investor Real Estate portfolio 50% from the end of 2007 • Doubled our loan loss allowance to $2.7 billion • Increased our Tier 1 common1 ratio 194 basis points to 8.5% in four years • Reduced our loan to deposit ratio from 100% to 81% – we are core funded As a result of our de-risking efforts, our strong core franchise, diverse business mix and a clear path to building sustainable performance, we believe Regions is clearly a much stronger fran- chise today. Our strategy is working. Recovery and rebuilding do take time, but with each pass- ing quarter, we are demonstrating progress and profi tability moving forward. THANK YOU In closing, I want to thank our Board of Directors for their support and guidance over the past year. I greatly appreciate our chairman, Earnie Deavenport, for his wise counsel and commit- ment. I also want to thank Dr. Condoleezza Rice for her valuable insight and expertise as an advisor to our Board of Directors. And I also want to thank our Operating Committee for its leadership through an incredibly challenging environment, and our associates who provide award-winning customer service every day. Finally, I thank you, our shareholders, for your confi dence, continuing support and investment. O.B. Grayson Hall President and Chief Executive Offi cer From left to right: Earnest W. Deavenport Jr., Dr. Condoleezza Rice, O.B. Grayson Hall Jr. 1 Non-GAAP, see Form 10-K Table 2 for GAAP to non-GAAP reconciliation 12 REGIONS 2011 ANNUAL REPORT 40759_Text.indd a12 40759_Text.indd a12 3/2/12 9:19 AM 3/2/12 9:19 AM Regions partnered with B.E.S.T. Academy to create a Youth Savings Program PUTTING PEOPLE FIRST 2011 CORPORATE SOCIAL RESPONSIBILITY AT REGIONS At Regions, our mission is to make life better, and we take great pride in how our business is shaped by our core values: Put people fi rst, do what is right, focus on your customer, reach higher and enjoy life. By living our values, we ac- complished some truly amazing things in 2011. REGIONS 2011 ANNUAL REPORT 13 40759_Text.indd a13 40759_Text.indd a13 3/2/12 9:19 AM 3/2/12 9:19 AM Put people fi rst: We were quick to respond on April 27 when one of the largest tornado out- breaks in history carved massive swaths of destruction across four of the states Regions calls home: Alabama, Georgia, Tennessee and Mississippi. More than 300 people lost their lives, and many more lost their homes. Within hours, Regions contributed $1 million to the Ameri- can National Red Cross Tornado Disaster Relief Fund, and we quickly set up mobile ATMs so people in the hardest hit areas would have access to funds and all Regions Bank offi ces began accepting donations from the public. In addition, Regions associates contributed more than $116,000 to help 107 of our colleagues who suffered signifi cant losses from the storm. We are ready to help in good times and bad. Throughout the year, we rolled up our sleeves to make life better in our communities. In total, Regions associates volunteered more than 200,000 hours with more than 5,000 organi- zations. Many of these hours were through our “What a Difference a Day Makes” program, which gives everyone a day off a year to volunteer. Do what is right: Integrity and trust are at the heart of our company, and our fair and respon- sible banking practices show our strong com- mitment to do what is right. We offer products and services our customers need at fair prices. We treat customers consistently in every phase of the lending process, and we help them make informed decisions about their banking options. We remain committed to helping economically challenged communities thrive. As part of our fair and responsible banking practices, we make sure people with disabilities have access to banking. We make bank state- ments available in Braille, enlarged type and audio and offer sight checks for customers who are blind or have low vision. For customers who are deaf, hard of hearing or have speech dif- fi culties, we have a dedicated TTY line, accept Telecommunications Relay Service calls and can provide a sign language interpreter upon request. Fair and responsible banking is not only about people but also about where we live and operate. Through Regions Timberland Group, a pioneer in timberland investing, we manage in excess of 1.6 million acres of timberland world- wide in an economically, environmentally and socially responsible manner. We maintain and improve the health and productivity of these timberlands in a way designed to minimize impact to air, water, and wildlife while enhanc- ing and sustaining the forests. The majority of our forests are certifi ed under the American Tree Farm System, Sustainable Forestry Initia- tive and/or Forest Stewardship Council. Focus on your customer: As unemployment levels continue to be elevated and the housing crisis lingers, our goal remains the same – to ensure customers who encounter fi nancial dif- fi culty know they have options. In 2007, we launched an extensive Customer Assistance Program for troubled borrowers well before the full effects of the credit crisis were re- alized. To date, we have restructured more than $3.7 billion in mortgages and helped more than 42,000 homeowners remain in their homes. Through the U.S. Treasury sponsored Home Affordable Modifi cation Program for loans ser- viced on behalf of Fannie Mae and Freddie Mac, we have initiated 2,783 trial period modi- fi cations for $417 million, and of those, 2,120 have been completed for $318 million. We continue to lend money for housing, and in 2011, we originated almost 42,000 loans for the purchase or refi nancing of homes, and more than 15,000 of those loans were to low- and moderate-income borrowers and neighborhoods. 14 REGIONS 2011 ANNUAL REPORT 40759_Text.indd a14 40759_Text.indd a14 3/2/12 9:19 AM 3/2/12 9:19 AM Regions associates quickly responded following one of the largest tornado outbreaks in U.S. history In 2011, Regions originated nearly 42,000 loans for the purchase or refi nancing of homes like this one for Cambryn Doran We are investing in the future of our communi- ties and believe that small businesses are the heart of our economy because they generate jobs and income. Providing capital to small businesses to foster economic growth is just one way we focus on our customers. We are proud to say that in 2011 we were the No. 1 Small Business Administration 504 lender in Alabama and Florida and the fi fth largest in the United States. Reach higher: At Regions, we believe fi nancial education and good money management are crucial life skills. We are committed to providing fi nancial education resources to our customers and communities to produce a positive change in fi nancial behavior, responsible use of fi nan- cial products and good money management. Financial education resources are available for everyone on regions.com, and each year Regions associates conduct fi nancial education seminars in our communities. These programs include school programs as well as partner- ship programs with community organizations, churches and employers. This past year we partnered with B.E.S.T. Academy, a public high school in Atlanta, to create a Youth Savings Program. The program teaches students the importance of saving, and as a bonus, Regions offered to match the amount the students saved during the year. In 2012, we will continue the expansion of fi nancial education programs and plan to launch centers for fi nancial empower- ment in several key markets. Enjoy life: At Regions, we are in the business of banking. But we are also in the business of life. Whether it’s providing timesaving products and services, cash for a much needed vacation, or lending a hand with a community event, when we live our values and deliver on our promises, we make life better for our customers and the communities where we live and work. Read more about Corporate Social Responsibil- ity at Regions: www.regions.com/socialresponsibility REGIONS 2011 ANNUAL REPORT 15 40759_Text.indd a15 40759_Text.indd a15 3/2/12 9:19 AM 3/2/12 9:19 AM EXECUTIVE MANAGEMENT O.B. Grayson Hall Jr. President and Chief Executive Offi cer Executive Council and Operating Committee David B. Edmonds Senior Executive Vice President Chief Administrative Offi cer Executive Council and Operating Committee David J. Turner Jr. Senior Executive Vice President Chief Financial Offi cer Executive Council and Operating Committee Fournier J. “Boots” Gale III Senior Executive Vice President General Counsel and Corporate Secretary Executive Council and Operating Committee C. Matthew Lusco Senior Executive Vice President Chief Risk Offi cer Executive Council and Operating Committee John B. Owen Senior Executive Vice President Consumer Services Group Executive Council and Operating Committee John Asbury Senior Executive Vice President Business Services Group Operating Committee John C. Carson Jr. Chief Executive Offi cer Morgan Keegan & Company, Inc. Operating Committee Brett D. Couch Senior Executive Vice President Florida Region President Operating Committee 16 REGIONS 2011 ANNUAL REPORT Barb Godin Senior Executive Vice President Chief Credit Offi cer and Head of Credit Operations Operating Committee C. Keith Herron Senior Executive Vice President Midsouth Region President Operating Committee Ellen Jones Senior Executive Vice President Chief Financial Offi cer for Business Operations and Support Operating Committee David R. Keenan Senior Executive Vice President Director of Human Resources Operating Committee Scott M. Peters Senior Executive Vice President Chief Marketing Offi cer Operating Committee William D. Ritter Senior Executive Vice President Wealth Management Group Operating Committee Cynthia M. Rogers Senior Executive Vice President Operations and Technology Group Operating Committee Ronald G. Smith Senior Executive Vice President Southwest Region President Operating Committee John M. Turner Jr. Senior Executive Vice President Central Region President Operating Committee 40759_Text.indd a16 40759_Text.indd a16 3/6/12 12:19 PM 3/6/12 12:19 PM Sitting left to right: Fournier J. “Boots” Gale III, Barb Godin First row, standing: David J. Turner Jr., Cynthia M. Rogers, Scott M. Peters, O.B. Grayson Hall Jr., John B. Owen, John Asbury, C. Matthew Lusco Back row, standing: David B. Edmonds, Brett D. Couch, John M. Turner Jr., William D. Ritter, Ronald G. Smith, David R. Keenan, C. Keith Herron, Ellen Jones Not pictured: John C. Carson Jr. 40759_Text.indd a17 40759_Text.indd a17 3/2/12 9:19 AM 3/2/12 9:19 AM First row, left to right: Carolyn H. Byrd, Earnest W. Deavenport Jr., O.B. Grayson Hall Jr., Lee J. Styslinger III Second row: David J. Cooper Sr., Charles D. McCrary, Samuel W. Bartholomew Jr., James R. Malone, Don DeFosset, Susan W. Matlock Third row: Ruth Ann Marshall, Eric C. Fast, John R. Roberts, John D. Johns, John E. Maupin Jr., George W. Bryan 40759_Text.indd a18 40759_Text.indd a18 3/2/12 9:19 AM 3/2/12 9:19 AM BOARD OF DIRECTORS Earnest W. Deavenport Jr. Non-Executive Chairman of the Board Regions Financial Corporation Susan W. Matlock President and Chief Executive Offi cer Innovation Depot Samuel W. Bartholomew Jr. Of Counsel, Adams and Reese LLP John E. Maupin Jr. President, Morehouse School of Medicine George W. Bryan Chief Executive Offi cer Old Waverly Properties, LLC Charles D. McCrary President and Chief Executive Offi cer Alabama Power Company Carolyn H. Byrd Chairman and Chief Executive Offi cer GlobalTech Financial, LLC John R. Roberts Managing Partner (Retired) Mid-South Region, Arthur Andersen LLP Lee J. Styslinger III Chief Executive Offi cer, Altec, Inc. David J. Cooper Sr. Vice Chairman Cooper/T. Smith Corporation Don DeFosset Retired Chairman President and Chief Executive Offi cer Walter Industries, Inc. Eric C. Fast President and Chief Executive Offi cer Crane Co. O.B. Grayson Hall Jr. President and Chief Executive Offi cer Regions Financial Corporation John D. Johns Chairman, President and Chief Executive Offi cer Protective Life Corporation James R. Malone Managing Partner, Qorval LLC Ruth Ann Marshall Former President The Americas, for MasterCard International, Inc. REGIONS 2011 ANNUAL REPORT 19 40759_Text.indd a19 40759_Text.indd a19 3/2/12 9:19 AM 3/2/12 9:19 AM (In millions, except per share data) 2011 2010 2009 EARNINGS SUMMARY Income (loss) from continuing operations available to common shareholders Net income (loss) available to common shareholders $ (25) $ (429) $ (692) $ (1,304) $ (763) $ (1,261) Earnings (loss) per common share from continuing operations – diluted Earnings (loss) per common share – diluted $ (0.02) $ (0.34) $ (0.56) $ (0.62) $ (1.32) $ (1.27) BALANCE SHEET SUMMARY At year-end Loans net of unearned income Assets Deposits Long-term debt Stockholders’ equity Average balances – Continuing Operations Loans net of unearned income Assets Deposits Long-term debt Stockholders’ equity SELECTED RATIOS $ 77,594 $ 82,864 132,351 127,050 94,614 95,627 13,190 8,110 16,734 16,499 $ 90,674 142,318 98,680 18,464 17,881 $ 80,673 $ 86,660 132,720 126,719 96,489 95,671 15,489 11,240 15,916 15,350 $ 94,523 139,468 94,612 18,501 16,224 Tangible common stockholders’ equity to tangible assets (non-GAAP)1 Allowance for loan losses as a percentage of loans net of unearned income Allowance for credit losses as a percentage of loans net of unearned income 6.58% 3.54 3.64 6.04% 3.84 3.93 6.22% 3.43 3.52 Effi ciency ratio (non-GAAP)1 Tier 1 common (non-GAAP)1 Tier 1 capital OTHER INFORMATION 64.56 67.74 67.88 8.51 13.28 7.85 12.40 7.15 11.54 Basic Weighted-average number of common shares outstanding Diluted Weighted-average number of common shares outstanding Total Branch Outlets ATMs 1,258 1,258 1,726 2,083 1,227 1,227 1,772 2,148 989 989 1,895 2,304 1See Table 2 in Form 10-K for GAAP to non-GAAP reconciliations. 40759_Text.indd a20 40759_Text.indd a20 3/7/12 9:40 AM 3/7/12 9:40 AM UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2011 OR ‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to REGIONS FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Commission File Number 000-50831 Delaware (State or other jurisdiction of incorporation or organization) 63-0589368 (I.R.S. Employer Identification No.) 1900 Fifth Avenue North, Birmingham, Alabama 35203 (Address of principal executive offices) Registrant’s telephone number, including area code: (205) 944-1300 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $.01 par value 8.875% Trust Preferred Securities of Regions Financing Trust III New York Stock Exchange New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No È Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes È No ‘ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes È No ‘ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer È Non-accelerated filer ‘ (Do not check if a smaller reporting company) Accelerated filer ‘ Smaller reporting company ‘ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ‘ No È State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. Common Stock, $.01 par value—$7,594,703,404 as of June 30, 2011. Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. Common Stock, $.01 par value—1,260,114,608 shares issued and outstanding as of February 15, 2012 Portions of the proxy statement for the Annual Meeting to be held on May 17, 2012 are incorporated by reference into Part III. DOCUMENTS INCORPORATED BY REFERENCE REGIONS FINANCIAL CORPORATION Form 10-K INDEX PART I Forward-Looking Statements Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART II Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. PART III Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Item 15. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PAGE 1 3 23 41 41 41 42 43 45 46 46 122 220 220 220 221 223 223 224 224 225 232 i PART I FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K, other periodic reports filed by Regions Financial Corporation (“Regions”) under the Securities Exchange Act of 1934, as amended, and any other written or oral statements made by or on behalf of Regions may include forward-looking statements. The Private Securities Litigation Reform Act of 1995 (the “Act”) provides a safe harbor for forward-looking statements which are identified as such and are accompanied by the identification of important factors that could cause actual results to differ materially from the forward-looking statements. For these statements, we, together with our subsidiaries, unless the context implies otherwise, claim the protection afforded by the safe harbor in the Act. Forward-looking statements are not based on historical information, but rather are related to future operations, strategies, financial results or other developments. Forward-looking statements are based on management’s expectations as well as certain assumptions and estimates made by, and information available to, management at the time the statements are made. Those statements are based on general assumptions and are subject to various risks, uncertainties and other factors that may cause actual results to differ materially from the views, beliefs and projections expressed in such statements. These risks, uncertainties and other factors include, but are not limited to, those described below: • • • • • • • • • • The Dodd-Frank Wall Street Reform and Consumer Protection Act became law on July 21, 2010, and a number of legislative, regulatory and tax proposals remain pending. Additionally, the U.S. Treasury and federal banking regulators continue to implement, but are also beginning to wind down, a number of programs to address capital and liquidity in the banking system. Proposed rules, including those that are part of the Basel III process, could require banking institutions to increase levels of capital. All of the foregoing may have significant effects on Regions and the financial services industry, the exact nature and extent of which cannot be determined at this time. Regions’ ability to mitigate the impact of the Dodd-Frank Act on debit interchange fees through revenue enhancements and other revenue measures, which will depend on various factors, including the acceptance by customers of modified fee structures for Regions’ products and services. The impact of compensation and other restrictions imposed under the Troubled Asset Relief Program (“TARP”) until Regions repays the outstanding preferred stock and warrant issued under the TARP, including restrictions on Regions’ ability to attract and retain talented executives and associates. Possible additional loan losses, impairment of goodwill and other intangibles, and adjustment of valuation allowances on deferred tax assets and the impact on earnings and capital. Possible changes in interest rates may increase funding costs and reduce earning asset yields, thus reducing margins. Increases in benchmark interest rates would also increase debt service requirements for customers whose terms include a variable interest rate, which may negatively impact the ability of borrowers to pay as contractually obligated. Possible changes in general economic and business conditions in the United States in general and in the communities Regions serves in particular, including any prolonging or worsening of the current unfavorable economic conditions, including unemployment levels. Possible changes in the creditworthiness of customers and the possible impairment of the collectability of loans. Possible changes in trade, monetary and fiscal policies, laws and regulations, and other activities of governments, agencies, and similar organizations, may have an adverse effect on business. The current stresses in the financial and real estate markets, including possible continued deterioration in property values. Regions’ ability to manage fluctuations in the value of assets and liabilities and off-balance sheet exposure so as to maintain sufficient capital and liquidity to support Regions’ business. 1 • • • • • • • • • • • • • • • • • • Regions’ ability to expand into new markets and to maintain profit margins in the face of competitive pressures. Regions’ ability to develop competitive new products and services in a timely manner and the acceptance of such products and services by Regions’ customers and potential customers. Regions’ ability to keep pace with technological changes. Regions’ ability to effectively manage credit risk, interest rate risk, market risk, operational risk, legal risk, liquidity risk, and regulatory and compliance risk. Regions’ ability to ensure adequate capitalization which is impacted by inherent uncertainties in forecasting credit losses. The cost and other effects of material contingencies, including litigation contingencies, and any adverse judicial, administrative, or arbitral rulings or proceedings. The effects of increased competition from both banks and non-banks. The effects of geopolitical instability and risks such as terrorist attacks. Possible changes in consumer and business spending and saving habits could affect Regions’ ability to increase assets and to attract deposits. The effects of weather and natural disasters such as floods, droughts, wind, tornadoes and hurricanes, and the effects of man-made disasters. Possible downgrades in ratings issued by rating agencies. Potential dilution of holders of shares of Regions’ common stock resulting from the U.S. Treasury’s investment in TARP. Possible changes in the speed of loan prepayments by Regions’ customers and loan origination or sales volumes. Possible acceleration of prepayments on mortgage-backed securities due to low interest rates, and the related acceleration of premium amortization on those securities. The effects of problems encountered by larger or similar financial institutions that adversely affect Regions or the banking industry generally. Regions’ ability to receive dividends from its subsidiaries. The effects of the failure of any component of Regions’ business infrastructure which is provided by a third party. Changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies. • With regard to the sale of Morgan Keegan: • the possibility that regulatory and other approvals and conditions to the transaction are not received on a timely basis or at all; the possibility that modifications to the terms of the transaction may be required in order to obtain or satisfy such approvals or conditions; changes in the anticipated timing for closing the transaction; business disruption during the pendency of or following the transaction; diversion of management time on transaction-related issues; reputational risks; and the reaction of customers and counterparties to the transaction. • The effects of any damage to Regions’ reputation resulting from developments related to any of the items identified above. The words “believe,” “expect,” “anticipate,” “project” and similar expressions often signify forward- looking statements. You should not place undue reliance on any forward-looking statements, which speak only as of the date made. We assume no obligation to update or revise any forward-looking statements that are made from time to time. See also Item 1A. “Risk Factors” of this Annual Report on Form 10-K. 2 Item 1. Business Regions Financial Corporation (together with its subsidiaries on a consolidated basis, “Regions” or “Company”) is a financial holding company headquartered in Birmingham, Alabama, which operates throughout the South, Midwest and Texas. Regions provides traditional commercial, retail and mortgage banking services, as well as other financial services in the fields of investment banking, asset management, trust, mutual funds, securities brokerage, insurance and other specialty financing. At December 31, 2011, Regions had total consolidated assets of approximately $127.0 billion, total consolidated deposits of approximately $95.6 billion and total consolidated stockholders’ equity of approximately $16.5 billion. Regions is a Delaware corporation and on July 1, 2004, became the successor by merger to Union Planters Corporation and the former Regions Financial Corporation. Its principal executive offices are located at 1900 Fifth Avenue North, Birmingham, Alabama 35203, and its telephone number at that address is (205) 944-1300. Banking Operations Regions conducts its banking operations through Regions Bank, an Alabama chartered commercial bank that is a member of the Federal Reserve System. At December 31, 2011, Regions operated approximately 2,100 ATMs and 1,726 banking offices in Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Mississippi, Missouri, North Carolina, South Carolina, Tennessee, Texas and Virginia. The following chart reflects the distribution of branch locations in each of the states in which Regions conducts its banking operations. Alabama . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Arkansas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Georgia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indiana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Iowa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kentucky . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Louisiana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mississippi Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . North Carolina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . South Carolina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tennessee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Branches 243 98 376 137 68 64 13 16 114 146 67 7 30 259 85 3 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,726 Other Financial Services Operations In addition to its banking operations, Regions provides additional financial services through the following subsidiaries: Morgan Keegan & Company, Inc. (“Morgan Keegan”), a subsidiary of Regions Financial Corporation, is a full-service regional brokerage and investment banking firm. Morgan Keegan offers products and services including securities brokerage, trust, asset management, financial planning, mutual funds, securities underwriting, sales and trading, and investment banking. Morgan Keegan employs approximately 1,200 financial 3 advisors offering products and services to individual and institutional investors through 90 full-service offices in 20 states. On January 11, 2012 Regions announced that it had entered into a stock purchase agreement to sell Morgan Keegan, and related affiliates, to Raymond James Financial, Inc. The transaction is expected to close around the end of the first quarter, subject to regulatory approvals and customary closing conditions. Morgan Asset Management and Regions Morgan Keegan Trust are not included in the sale and will remain part of Regions’ Wealth Management organization. Regions Insurance Group, Inc., a subsidiary of Regions Financial Corporation, is an insurance broker that offers insurance products through its subsidiaries Regions Insurance, Inc., headquartered in Birmingham, Alabama, and Regions Insurance Services, Inc., headquartered in Memphis, Tennessee. Through its insurance brokerage operations in Alabama, Arkansas, Indiana, Louisiana, Missouri, Mississippi, Tennessee and Texas, Regions Insurance, Inc. offers insurance coverage for various lines of personal and commercial insurance, such as property, casualty, life, health and accident insurance. Regions Insurance Services, Inc. offers credit-related insurance products, such as title, term life, credit life, environmental, crop and mortgage insurance, as well as debt cancellation products to customers of Regions. Regions Insurance Group, Inc. is one of the twenty largest insurance brokers in the United States based on annual revenues. Regions has several subsidiaries and affiliates that are agents or reinsurers of credit life insurance products relating to the activities of certain affiliates of Regions. Regions Investment Services, Inc., which sells annuities and life insurance products to Regions Bank customers, is a wholly-owned subsidiary of Regions Bank. Regions Equipment Finance Corporation, a subsidiary of Regions Bank, provides domestic and international equipment financing products, focusing on commercial clients. Acquisition Program A substantial portion of the growth of Regions from its inception as a bank holding company in 1971 has been through the acquisition of other financial institutions, including commercial banks and thrift institutions, and the assets and deposits of those financial institutions. As part of its ongoing strategic plan, Regions periodically evaluates business combination opportunities. Any future business combination or series of business combinations that Regions might undertake may be material, in terms of assets acquired or liabilities assumed, to Regions’ financial condition. Historically, business combinations in the financial services industry have typically involved the payment of a premium over book and market values. This practice could result in dilution of book value and net income per share for the acquirer. Segment Information Reference is made to Note 22 “Business Segment Information” to the consolidated financial statements included under Item 8. of this Annual Report on Form 10-K for information required by this item. Supervision and Regulation Regions and its subsidiaries are subject to the extensive regulatory framework applicable to bank holding companies and their subsidiaries. Regulation of financial institutions such as Regions and its subsidiaries is intended primarily for the protection of depositors, the Federal Deposit Insurance Corporation’s (“FDIC”) Deposit Insurance Fund (the “DIF”) and the banking system as a whole, and generally is not intended for the protection of stockholders or other investors. Described below are the material elements of selected laws and regulations applicable to Regions and its subsidiaries. The descriptions are not intended to be complete and are qualified in their entirety by reference to the full text of the statutes and regulations described. Changes in applicable law or regulation, and in their interpretation and application by regulatory agencies and other governmental authorities, cannot be predicted, but they may have a material effect on the business and results of Regions and its subsidiaries. 4 Overview Regions is registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) as a bank holding company and has elected to be treated as a financial holding company under the Bank Holding Company Act of 1956, as amended (“BHC Act”). As such, Regions and its subsidiaries are subject to the supervision, examination and reporting requirements of the BHC Act and the regulations of the Federal Reserve. Generally, the BHC Act provides for “umbrella” regulation of financial holding companies by the Federal Reserve and functional regulation of holding company subsidiaries by applicable regulatory agencies. The BHC Act, however, requires the Federal Reserve to examine any subsidiary of a bank holding company, other than a depository institution, engaged in activities permissible for a depository institution. The Federal Reserve is also granted the authority, in certain circumstances, to require reports of, examine and adopt rules applicable to any holding company subsidiary. In general, the BHC Act limits the activities permissible for bank holding companies. Bank holding companies electing to be treated as financial holding companies, however, may engage in additional activities under the BHC Act as described below under “—Permissible Activities under the BHC Act.” For a bank holding company to be eligible to elect financial holding company status, all of its subsidiary insured depository institutions must be well-capitalized and well-managed as described below under “—Regulatory Remedies Under the FDIA” and must have received at least a satisfactory rating on such institution’s most recent examination under the Community Reinvestment Act of 1977 (the “CRA”). The bank holding company itself must also be well-capitalized and well-managed in order to be eligible to elect financial holding company status. If a financial holding company fails to continue to meet any of the prerequisites for financial holding company status after engaging in activities not permissible for bank holding companies that have not elected to be treated as financial holding companies, the company must enter into an agreement with the Federal Reserve to comply with all applicable capital and management requirements. If the company does not return to compliance within 180 days, the Federal Reserve may order the company to divest its subsidiary banks or the company may be required to discontinue or divest investments in companies engaged in activities permissible only for a bank holding company electing to be treated as a financial holding company. Regions Bank is a member of the FDIC, and, as such, its deposits are insured by the FDIC to the extent provided by law. Regions Bank is an Alabama state-chartered bank and a member of the Federal Reserve System. It is generally subject to supervision and examination by both the Federal Reserve and the Alabama Banking Department. The Federal Reserve and the Alabama Banking Department regularly examine the operations of Regions Bank and are given authority to approve or disapprove mergers, acquisitions, consolidations, the establishment of branches and similar corporate actions. The federal and state banking regulators also have the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law. Regions Bank is subject to numerous statutes and regulations that affect its business activities and operations, including various consumer protection laws and regulations. As described below under “—Regulatory Reforms,” Regions Bank is also subject to supervision by the Consumer Financial Protection Bureau. Many of Regions’ non-bank subsidiaries, such as Morgan Keegan & Company, Inc. (“Morgan Keegan”), are also subject to regulation by various federal and state agencies. As a registered investment adviser and broker-dealer, Morgan Keegan and its subsidiaries are subject to regulation and examination by the Securities and Exchange Commissioner (“SEC”), state securities regulators, the Financial Industry Regulatory Authority (“FINRA”), the New York Stock Exchange (“NYSE”) and other self-regulatory organizations (“SROs”). All of these regulations may affect Morgan Keegan’s manner of operation and profitability. Regulatory Reforms The events of the past few years have led to numerous new laws and regulations in the United States applicable to financial institutions. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the 5 “Dodd-Frank Act”), which was enacted in July 2010, significantly restructures the financial regulatory regime in the United States and provides for enhanced supervision and prudential standards for, among other things, bank holding companies like Regions that have total consolidated assets of $50 billion or more. The implications of the Dodd-Frank Act for our business will depend to a large extent on the manner in which rules adopted pursuant to the Dodd-Frank Act are implemented by the Federal Reserve, the FDIC, the SEC, and other government agencies, as well as potential changes in market practices and structures in response to the requirements of those rules. New laws or regulations or changes to existing laws and regulations (including changes in interpretation or enforcement) could materially adversely affect our financial condition or results of operations. As discussed further throughout this section, many aspects of the Dodd-Frank Act are subject to further rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on Regions and its subsidiaries or the financial services industry generally. In addition to the discussion in this section, see “Risk Factors—Recent legislation regarding the financial services industry may have a significant adverse effect on our operations” for a discussion of the potential impact legislative and regulatory reforms may have on our results of operations and financial condition. Financial Stability Oversight Council. The Dodd-Frank Act creates a new systemic risk oversight body, the Financial Stability Oversight Council (“FSOC”) to coordinate the efforts of the primary U.S. financial regulatory agencies (including the Federal Reserve, the FDIC and the SEC) in establishing regulations to address systemic financial stability concerns. The Dodd-Frank Act directs the FSOC to make recommendations to the Federal Reserve regarding supervisory requirements and prudential standards applicable to systemically important financial institutions (including bank holding companies with over $50 billion in assets, such as Regions), including capital, leverage, liquidity and risk-management requirements. The Dodd-Frank Act mandates that the requirements applicable to systemically important financial institutions be more stringent than those applicable to other financial companies. The Federal Reserve has discretionary authority to establish additional prudential standards, on its own or at the FSOC’s recommendation. The Dodd-Frank Act also requires the Federal Reserve to conduct annual analyses of such bank holding companies to evaluate whether the companies have sufficient capital on a total consolidated basis necessary to absorb losses as a result of adverse economic conditions. Enhanced Supervision and Prudential Standards. In December 2011, the Federal Reserve introduced a new proposal aimed at minimizing risks associated with U.S. bank holding companies with consolidated assets of $50 billion or more, often referred to as systemically important financial institutions (“SIFI”). The Federal Reserve’s proposal includes risk-based capital and leverage requirements, liquidity requirements, stress tests, single-counterparty credit limits and overall risk management requirements, early remediation requirements and resolution planning and credit exposure reporting. The proposed rules would address a wide, diverse array of regulatory areas, each of which is highly complex. In some cases they would implement financial regulatory requirements being proposed for the first time, and in others overlap with other regulatory reforms. The proposed rules also address the Dodd-Frank Act’s early remediation requirements applicable to bank holding companies that have total consolidated assets of $50 billion or more. The proposed remediation rules are modeled after the prompt corrective action regime, described under “—Safety and Soundness Standards” below, but are designed to require action beginning in the earlier stages of a company’s financial distress by mandating action on the basis of arranged triggers, including capital and leverage, stress test results, liquidity, and risk management. Comments on these proposed rules for systemically important financial institutions (“Proposed SIFI Rules”) are due by March 31, 2012. The full impact of the Proposed SIFI Rules on Regions is being analyzed, but will not be known until the rules, and other regulatory initiatives that overlap with these rules, are finalized and their combined impacts can be understood. Federal Reserve’s Comprehensive Capital Assessment Review. In November 2011, the Federal Reserve published a final rule which requires U.S. bank holding companies with total consolidated assets of $50 billion or more (such as Regions) to submit annual capital plans, along with related stress test requirements, to the 6 appropriate Federal Reserve Bank for approval. The capital analysis and review process provided for in the rule is known as the Comprehensive Capital Analysis and Review (“CCAR”). The purpose of the capital plan is to ensure that these bank holding companies have robust, forward-looking capital planning processes that account for each company’s unique risks and that permit continued operations during times of economic and financial stress. The capital plans are required to be submitted on an annual basis. Such bank holding companies will also be required to collect and report certain related data on a quarterly basis to allow the Federal Reserve to monitor the companies’ progress against their annual capital plans. The comprehensive capital plans, which are prepared using Basel I capital guidelines, include a view of capital adequacy under four scenarios – a bank holding company-defined baseline scenario, a baseline scenario provided by the Federal Reserve, at least one bank holding company-defined stress scenario and a stress scenario provided by the Federal Reserve. The rules require, among other things, that a covered bank holding company may not make a capital distribution unless it will meet all minimum regulatory capital ratios and have a ratio of Tier 1 common equity to risk-weighted assets of at least 5% after making the distribution. The rules also provide that the Federal Reserve may object to a capital plan if the plan does not show that the covered bank holding company will maintain a Tier 1 common equity ratio of at least 5 percent on a pro forma basis under expected and stressful conditions throughout the nine-quarter planning horizon covered by the capital plan. Covered bank holding companies, including Regions, may pay dividends and repurchase stock only in accordance with a capital plan that has been reviewed and approved by the Federal Reserve. The CCAR rule, consistent with prior Federal Reserve Board guidance, provides that capital plans contemplating dividend payout ratios exceeding 30% of after-tax net income will receive particularly close scrutiny. As part of this process, Regions will also provide the Federal Reserve with projections covering the time period it will take for Regions to fully comply with Basel III capital guidelines, including the 7% Tier 1 common equity, 8.5% Tier 1 capital and 3% leverage ratios as well as granular components of those elements. Regions’ capital plan was submitted on January 9, 2012. The Proposed SIFI Rules, discussed earlier in this section under “Enhanced Supervision and Prudential Standards,” would expand the stress testing requirements to include, among other things, stress testing by the Federal Reserve under three economic and financial scenarios, including adverse and severely adverse scenarios. We would also be required to conduct our own semi-annual stress analysis (together with the Federal Reserve’s stress analysis, the “Stress Tests”) to assess the potential impact on Regions, including our consolidated earnings, losses and capital, under each of the economic and financial conditions used as part of the Federal Reserve’s annual stress analysis. A summary of the results of certain aspects of the Federal Reserve’s stress analysis will be released publicly and will contain bank holding company specific information and results. We would also be required to disclose the results of our semi-annual stress analyses. Proposed Joint Guidance on Stress Testing. In addition to the stress testing requirements under the Proposed SIFI Rules, the federal banking agencies proposed joint guidance on stress testing on June 15, 2011. Unlike the Proposed SIFI Rules, the proposed joint guidance addresses stress testing in connection with overall risk management, and not just capital and liquidity stress testing. The June 2011 proposed guidance outlines high-level principles for stress testing practices, applicable to all Federal Reserve-supervised banking organizations with more than $10 billion in total consolidated assets, such as Regions. The proposed guidance highlights the importance of stress testing as an ongoing risk management practice that supports a banking organization’s forward-looking assessment of its risks. The agencies intend the proposed guidance to serve as a background for future rulemaking activities and supervisory initiatives. Comments were due on July 29, 2011. As of February 2012, no final rule has been adopted. The final rule is expected to be consistent with the stress testing requirements set forth under the Dodd-Frank Act and the Proposed SIFI Rules. Living Will Requirement. As required by the Dodd-Frank Act, the Federal Reserve and the FDIC have jointly issued a final rule that requires certain organizations, including each bank holding company with consolidated assets of $50 billion or more, to report periodically to regulators a plan (a so-called “living will”) for their rapid and orderly resolution in the event of material financial distress or failure. Regions’ resolution plan 7 must, among other things, ensure that our depository institution subsidiaries are adequately protected from risks arising from our other subsidiaries. The final rule sets specific standards for the resolution plans, including requiring strategic analysis of the plan’s components, a description of the range of specific actions the company proposes to take in resolution, and a description of the company’s organizational structure, material entities, interconnections and interdependencies, and management information systems, among other elements. In addition, the FDIC has issued a final rule that requires insured depository institutions with $50 billion or more in total assets, such as Regions Bank, to submit to the FDIC periodic contingency plans for resolution in the event of the institution’s failure. The rule requires these insured institutions to submit a resolution plan that will enable the FDIC, as receiver, to resolve the bank in a manner that ensures that depositors receive access to their insured deposits within one business day of the institution’s failure, maximizes the net-present-value return from the sale or disposition of its assets, and minimizes the amount of any loss to be realized by the institution’s creditors. The final rule also sets specific standards for the resolution plans, including requiring a strategic analysis of the plan’s components, a description of the strategies for achieving the least costly resolution, and analyses of the financial company’s organization, material entities, interconnections and interdependencies, and management information systems, among other elements. The two “living will” rules are complementary. Debit Card Interchange Fees. The Dodd-Frank Act gives the Federal Reserve the authority to establish rules regarding interchange fees charged by payment card issuers for transactions in which a person uses certain types of debit cards, requiring that such fees be reasonable and proportional to the cost incurred by the issuer with respect to such transaction. In June 2011, the Federal Reserve approved its final rule on debit interchange fees. The final rule caps the maximum debit interchange fee at 21 cents, plus 5 basis points (multiplied by the amount of the transaction) to reflect a portion of fraud losses. The restrictions on interchange fees contained in the final rule are applicable to all debit card issuers who, together with their affiliates, possess more than $10 billion in assets, such as Regions Bank. The debit interchange fee provision took effect on October 1, 2011. In addition to the final rule on debit interchange fees, the Federal Reserve issued an interim final rule that provides an upward adjustment of a maximum of 1 cent to an issuer’s debit card interchange fee if the issuer establishes and implements procedures that meet specified fraud-prevention standards set forth under the interim final rule. In order to receive the adjustment, qualifying issuers must certify their eligibility to the payment card networks in which they participate. The fraud-prevention adjustment provision took effect on October 1, 2011, but may be revised by the Federal Reserve at a later date based on comments received through September 30, 2011. Regions Bank is currently eligible for this adjustment. The final rule on debit interchange fees also prohibits issuers and payment card networks from restricting the number of payment card networks on which an electronic debit transaction may be processed to fewer than two unaffiliated networks, regardless of the means by which a transaction may be authorized. This network exclusivity provision is applicable to all issuers, even those exempt from the debit interchange fees. Issuers will be subject to the network exclusivity rule beginning on April 1, 2012. Consumer Financial Protection Bureau. Title X of the Dodd-Frank Act provides for the creation of the Consumer Financial Protection Bureau (the “CFPB”), a new consumer financial services regulator. The CFPB is directed to prevent unfair, deceptive and abusive practices and ensure that all consumers have access to fair, transparent, and competitive markets for consumer financial products and services. The Dodd-Frank Act gives the CFPB authority to enforce and issue rules and regulations implementing existing consumer protection laws and responsibility for all such existing regulations. As of July 2011, depository institutions with assets exceeding $10 billion, such as Regions Bank, their affiliates, and other “larger participants” in the markets for consumer financial services (as determined by the CFPB) are subject to direct supervision by the CFPB, including any applicable examination, enforcement and reporting requirements the CFPB may establish. Orderly Liquidation Authority. The Dodd-Frank Act creates the Orderly Liquidation Authority (“OLA”), a resolution regime for systemically important non-bank financial companies and their non-bank affiliates, 8 including bank holding companies, under which the FDIC may be appointed receiver to liquidate such a company if, among other conditions, the company is in danger of default and presents a systemic risk to U.S. financial stability. This determination must come after supermajority recommendations by the Federal Reserve and the FDIC and consultation between the Secretary of the U.S. Treasury and the President. This resolution authority is similar to the FDIC resolution model for depository institutions, with certain modifications to reflect differences between depository institutions and non-bank financial companies and to reduce disparities between the treatment of creditors’ claims under the U.S. Bankruptcy Code and in an orderly liquidation authority proceeding compared to those that would exist under the resolution model for insured depository institutions. An Orderly Liquidation Fund will fund OLA liquidation proceedings through borrowings from the Treasury Department and risk-based assessments made, first, on entities that received more in the resolution than they would have received in liquidation to the extent of such excess, and second, if necessary, on bank holding companies with total consolidated assets of $50 billion or more, such as Regions. If an orderly liquidation is triggered, Regions could face assessments for the Orderly Liquidation Fund. We do not yet have an indication of the level of such assessments. U.S. Department of Treasury’s Assessment Fee Program. In late December 2011, the U.S. Department of the Treasury (“U.S. Treasury”) issued a proposed rule to implement Section 155 of the Dodd-Frank Act. Section 155 requires the U.S. Treasury to establish an assessment schedule for bank holding companies with total consolidated assets of $50 billion or more. Beginning on July 20, 2012, Regions will be required to pay assessments on a semiannual basis to cover expenses associated with the Office of Financial Research, the FSOC, and the FDIC’s Orderly Liquidation Authorities. Comments on the proposed rule are due to the U.S. Treasury in late February 2012. The proposed rule has already been approved by the FSOC. Regions believes the assessment will not be material to the Company’s consolidated financial position, results of operations, or cash flows. Volcker Rule. The Dodd-Frank Act requires the federal financial regulatory agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and private equity funds), with implementation starting as early as July 2012. The statutory provision is commonly called the “Volcker Rule”. In October 2011, federal regulators proposed rules to implement the Volcker Rule that included an extensive request for comments on the proposal, which were due by February 13, 2012. The proposed rules are highly complex, and many aspects of their application remain uncertain. Based on the proposed rules, Regions does not currently anticipate that the Volcker Rule will have a material effect on the operations of Regions and its subsidiaries. Regions may incur costs if it is required to adopt additional policies and systems to ensure compliance with the Volcker Rule. Until a final rule is adopted, the precise financial impact of the rule on Regions, its customers or the financial industry more generally, cannot be determined. Permissible Activities under the BHC Act In general, the BHC Act limits the activities permissible for bank holding companies to the business of banking, managing or controlling banks and such other activities as the Federal Reserve has determined to be so closely related to banking as to be properly incident thereto. A bank holding company electing to be treated as a financial holding company may also engage in a range of activities which are (i) financial in nature or incidental to such financial activity or (ii) complementary to a financial activity and which do not pose a substantial risk to the safety and soundness of a depository institution or to the financial system generally. These activities include securities dealing, underwriting and market making, insurance underwriting and agency activities, merchant banking and insurance company portfolio investments. The BHC Act does not place territorial restrictions on permissible non-banking activities of bank holding companies. The Federal Reserve has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the Federal Reserve has reasonable grounds to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company. 9 Capital Requirements Regions and Regions Bank are required to comply with the applicable capital adequacy standards established by the Federal Reserve. There are two basic measures of capital adequacy for bank holding companies that have been promulgated by the Federal Reserve: a risk-based measure and a leverage measure. Risk-based Capital Standards. The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in credit and market risk profiles among banks and financial holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. Currently the minimum guideline for the ratio of total capital (“Total capital”) to risk-weighted assets (including certain off-balance sheet items, such as standby letters of credit) is 8.0 percent. The regulatory capital rules state that voting common stockholders’ equity should be the predominant element within Tier 1 capital and that banking organizations should avoid over-reliance on non-common equity elements. At least half of the Total capital must be “Tier 1 capital,” which currently consists of qualifying common equity, qualifying noncumulative perpetual preferred stock (including related surplus), senior perpetual preferred stock issued to the U.S. Treasury as part of the Troubled Asset Relief Program Capital Purchase Program (the “CPP”), minority interests relating to qualifying common or noncumulative perpetual preferred stock issued by a consolidated U.S. depository institution or foreign bank subsidiary, and certain “restricted core capital elements,” as discussed below, less goodwill and certain other intangible assets. Currently, “Tier 2 capital” may consist of, among other things, qualifying subordinated debt, mandatorily convertible debt securities, preferred stock and trust preferred securities not included in the definition of Tier 1 capital, and a limited amount of the allowance for loan losses. Non-cumulative perpetual preferred stock, trust preferred securities and other so-called “restricted core capital elements” are currently limited to 25 percent of Tier 1 capital. Pursuant to the Dodd-Frank Act, trust preferred securities will be phased-out of the definition of Tier 1 capital of bank holding companies having consolidated assets exceeding $500 million, such as Regions, over a three-year period beginning in January 2013. Currently the minimum guideline to be considered well-capitalized for Tier 1 capital and Total capital is 6.0 percent and 10.0 percent, respectively. As of December 31, 2011, Regions’ consolidated Tier 1 capital to risk- adjusted assets and Total capital to risk-adjusted assets ratios were 13.28 percent and 16.99 percent, respectively. The elements currently comprising Tier 1 capital and Tier 2 capital and the minimum Tier 1 capital and Total capital ratios may be subject to change in the future, as discussed in greater detail below. The risk-based capital rules state that the capital requirements are minimum standards based primarily on broad credit-risk considerations and do not take into account the other types of risk a banking organization may be exposed to (e.g., interest rate, market, liquidity and operational risks). Basel I and II Standards. Regions currently calculates its risk-based capital ratios under guidelines adopted by the Federal Reserve based on the 1988 Capital Accord (“Basel I”) of the Basel Committee on Banking Supervision (the “Basel Committee”). In 2004, the Basel Committee published a new set of risk-based capital standards (“Basel II”) to revise Basel I. Basel II provides two approaches for setting capital standards for credit risk—an internal ratings-based approach tailored to individual institutions’ circumstances and a standardized approach that bases risk-weighting on external credit assessments to a much greater extent than permitted in the existing risk-based capital guidelines. Basel II also sets capital requirements for operational risk and refines the existing capital requirements for market risk exposures. A definitive final rule for implementing the advanced approaches of Basel II in the United States, which applies only to internationally active banking organizations, or “core banks” (defined as those with consolidated total assets of $250 billion or more or consolidated on-balance sheet foreign exposures of $10 billion or more) became effective on April 1, 2008. Other U.S. banking organizations may elect to adopt the requirements of this rule (if they meet applicable qualification requirements), but are not required to comply. The rule also allows a 10 banking organization’s primary federal supervisor to determine that application of the rule would not be appropriate in light of the bank’s asset size, level of complexity, risk profile or scope of operations. Regions Bank is currently not required to comply with Basel II. In July 2008, the U.S. bank regulatory agencies issued a proposed rule that would provide banking organizations that do not use the advanced approaches with the option to implement a new risk-based capital framework. This framework would adopt the standardized approach of Basel II for credit risk, the basic indicator approach of Basel II for operational risk, and related disclosure requirements. While this proposed rule generally parallels the relevant approaches under Basel II, it diverges where United States markets have unique characteristics and risk profiles, most notably with respect to risk weighting residential mortgage exposures. Comments on the proposed rule were due to the agencies by October 27, 2008, but a definitive final rule has not been issued as of February 2012. Basel III Standards. In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation, now officially identified by the Basel Committee as “Basel III.” Basel III, when implemented by the U.S. bank regulatory agencies and fully phased-in, will require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity. The Basel III final capital framework, among other things: • introduces as a new capital measure “Common Equity Tier 1”, or “CET1”, specifies that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and expands the scope of the adjustments as compared to existing regulations; • when fully phased in on January 1, 2019, requires banks to maintain: • • • • • as a newly adopted international standard, a minimum ratio of CET1 to risk-weighted assets of at least 4.5 percent, plus a 2.5 percent “capital conservation buffer” (which is added to the 4.5 percent CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7 percent); a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0 percent, plus the capital conservation buffer (which is added to the 6.0 percent Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5 percent upon full implementation); a minimum ratio of Total (that is, Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0 percent, plus the capital conservation buffer (which is added to the 8.0 percent total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5 percent upon full implementation); as a newly adopted international standard, a minimum leverage ratio of 3.0 percent, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (as the average for each quarter of the month-end ratios for the quarter); and under some circumstances, a “countercyclical capital buffer”, generally to be imposed when national regulators determine that excess aggregate credit growth becomes associated with a buildup of systemic risk, that would be a CET1 add-on to the capital conservation buffer in the range of 0 percent to 2.5 percent when fully implemented (potentially resulting in total buffers of between 2.5 percent and 5 percent). The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. 11 In July 2011, the Basel Committee introduced a consultative document establishing a requirement for a capital surcharge on certain globally systemically important banks (“G-SIBs”), and in November 2011, the Basel Committee issued final provisions substantially unchanged from the previous proposal. An “indicator-based approach” will be used to determine whether a bank is a G-SIB and the appropriate level of the surcharge to be applied. The “indicator-based approach” consists of five broad categories: size, interconnectedness, lack of substitutability, cross-jurisdictional activity and complexity. Banks found to be G-SIBs will be subject to a progressive CET1 surcharge ranging from 1% to 3.5% over the Basel III 7% CET1 requirement. The surcharge will become fully effective on January 1, 2019. Regions does not expect to be subject to this CET1 surcharge. The implementation of the Basel III final framework will commence January 1, 2013. On that date, banking institutions will be required to meet the following minimum capital ratios: • • • 3.5 percent CET1 to risk-weighted assets; 4.5 percent Tier 1 capital to risk-weighted assets; and 8.0 percent Total capital to risk-weighted assets. The Basel III final framework provides for a number of new deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets reliant on future profitability of the bank and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10 percent of CET1 or all such categories in the aggregate exceed 15 percent of CET1. Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2014 and will be phased-in over a five-year period (20 percent per year). The implementation of the capital conservation buffer will begin on January 1, 2016 at 0.625 percent and be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5 percent on January 1, 2019). The timing for the U.S. banking agency’s publication of proposed rules to implement the Basel III capital framework and the implementation schedule is uncertain. The release accompanying the Proposed SIFI Rules appears to indicate that rules implementing Basel III will be published for comment during the first quarter of 2012. The rules ultimately adopted may be different from the Basel III final framework as published in December 2010. The Dodd-Frank Act appears to require the Federal Reserve to adopt regulations imposing a continuing “floor” of the Basel I-based capital requirements in cases where the Basel II-based capital requirements and any changes in capital regulations resulting from Basel III otherwise would permit lower requirements. In December 2010, the Federal Reserve published for comment proposed regulations implementing this requirement. On June 14, 2011, the Federal Reserve, FDIC and Office of the Comptroller of the Currency (OCC) jointly approved a final rule which requires a banking organization operating under the agencies’ advanced approaches risk-based capital rules to adhere to the higher of the minimum requirements under the general risk-based capital rules and the minimum requirements under the advanced approaches risk-based capital rules. Leverage Requirements. Neither Basel I nor Basel II includes a leverage requirement as an international standard; however, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies to be considered well-capitalized. These guidelines provide for a minimum ratio of Tier 1 capital to total consolidated quarterly average assets (as defined for regulatory purposes), net of the loan loss reserve, goodwill and certain other intangible assets (the “leverage ratio”), of 3.0 percent for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies generally are required to maintain a leverage ratio of at least 4 percent. Regions’ Leverage ratio at December 31, 2011 was 9.91 percent. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory 12 levels without significant reliance on intangible assets. Furthermore, the Federal Reserve has indicated that it will consider a “tangible Tier 1 capital leverage ratio” (deducting all intangibles) and other indicators of capital strength in evaluating proposals for expansion or new activities. Liquidity Requirements. Historically, regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter, both in the U.S. and internationally, without required formulaic measures. The Basel III final framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, going forward will be required by regulation. One test, referred to as the liquidity coverage ratio (“LCR”), is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25 percent of its expected total cash outflow) under an acute liquidity stress scenario. The other, referred to as the net stable funding ratio (“NSFR”), is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements will incentivize banking entities to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source. The Basel III liquidity framework contemplates that the LCR will be subject to an observation period continuing through mid-2013 and subject to any revisions resulting from the analyses conducted and data collected during the observation period, implemented as a minimum standard on January 1, 2015. Similarly, it contemplates that the NSFR will be subject to an observation period through mid-2016 and, subject to any revisions resulting from the analyses conducted and data collected during the observation period, implemented as a minimum standard by January 1, 2018. As discussed above under “—Regulatory Reforms,” the Proposed SIFI Rules address liquidity requirements for bank holding companies. including Regions, with $50 billion or more in total consolidated assets. In the release accompanying those rules, the Federal Reserve states a general intention to incorporate the Basel III liquidity framework for the bank holding companies covered by the Proposed SIFI Rules or a “subset” of those bank holding companies. Although these rules do not include prescriptive ratios like the LCR and NSFR, they do include detailed liquidity-related requirements, including requirements for cashflow projections, liquidity stress testing (including, at a minimum, over time horizons that include an overnight time horizon, a 30-day time horizon, a 90-day time horizon and a 1-year time horizon), and a requirement that covered bank holding companies maintain a liquidity buffer of unencumbered highly liquid assets sufficient to meet projected net cash outflows and the projected loss or impairment of existing funding sources for 30 days over a range of liquidity stress scenarios. Capital Requirements of Regions Bank. Regions Bank is subject to substantially similar capital requirements as those applicable to Regions. As of December 31, 2011, Regions Bank was in compliance with applicable minimum capital requirements. Neither Regions nor Regions Bank has been advised by any federal banking agency of any specific minimum capital ratio requirement applicable to it as of December 31, 2011. Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including the termination of deposit insurance by the FDIC, and to certain restrictions on its business. See “—Regulatory Remedies under the FDIA” below. Safety and Soundness Standards Guidelines adopted by the federal bank regulatory agencies pursuant to the Federal Deposit Insurance Act, as amended (the “FDIA”), establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. In general, these guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. Additionally, the agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in 13 any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of the FDIA. See “—Regulatory Remedies under the FDIA” below. If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties. Regulatory Remedies under the FDIA The FDIA establishes a system of regulatory remedies to resolve the problems of undercapitalized institutions. The federal banking regulators have established five capital categories (“well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized”) and must take certain mandatory supervisory actions, and are authorized to take other discretionary actions, with respect to institutions which are undercapitalized, significantly undercapitalized or critically undercapitalized. The severity of these mandatory and discretionary supervisory actions depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the FDIA requires the banking regulator to appoint a receiver or conservator for an institution that is critically undercapitalized. The federal bank regulatory agencies have specified by regulation the current relevant capital levels for each category: “Well-Capitalized” “Adequately Capitalized” Leverage ratio of 5 percent, Tier 1 capital ratio of 6 percent, Total capital ratio of 10 percent, and Not subject to a written agreement, order, capital directive or regulatory remedy directive requiring a specific capital level. Leverage ratio of 4 percent, Tier 1 capital ratio of 4 percent, and Total capital ratio of 8 percent. “Undercapitalized” “Significantly Undercapitalized” Leverage ratio less than 4 percent, Tier 1 capital ratio less than 4 percent, or Total capital ratio less than 8 percent. Leverage ratio less than 3 percent, Tier 1 capital ratio less than 3 percent, or Total capital ratio less than 6 percent. “Critically Undercapitalized” Tangible equity to total assets less than 2 percent. For purposes of these regulations, the term “tangible equity” includes core capital elements counted as Tier 1 capital for purposes of the risk-based capital standards plus the amount of outstanding cumulative perpetual preferred stock (including related surplus), minus all intangible assets with certain exceptions. An institution that is classified as well-capitalized based on its capital levels may be classified as adequately capitalized, and an institution that is adequately capitalized or undercapitalized based upon its capital levels may be treated as though it were undercapitalized or significantly undercapitalized, respectively, if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. An institution that is categorized as undercapitalized, significantly undercapitalized or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking regulator. Under the FDIA, in order for the capital restoration plan to be accepted by the appropriate federal banking agency, a bank holding company must guarantee that a subsidiary depository institution will comply with its capital restoration plan, subject to certain limitations. The bank holding company must also provide appropriate assurances of performance. The obligation of a controlling bank holding company under the FDIA to fund a capital restoration plan is limited to the lesser of 5.0 percent of an undercapitalized subsidiary’s assets or the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in 14 any new line of business, except in accordance with an accepted capital restoration plan or with the approval of the FDIC. Institutions that are significantly undercapitalized or undercapitalized and either fail to submit an acceptable capital restoration plan or fail to implement an approved capital restoration plan may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions failing to submit or implement an acceptable capital restoration plan are subject to appointment of a receiver or conservator. Payment of Dividends Regions is a legal entity separate and distinct from its banking and other subsidiaries. The principal source of cash flow to Regions, including cash flow to pay dividends to its stockholders and principal and interest on any of its outstanding debt, is dividends from Regions Bank. There are statutory and regulatory limitations on the payment of dividends by Regions Bank to Regions, as well as by Regions to its stockholders. If, in the opinion of a federal bank regulatory agency, an institution under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the institution, could include the payment of dividends), such agency may require, after notice and hearing, that such institution cease and desist from such practice. The federal bank regulatory agencies have indicated that paying dividends that deplete an institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under the FDIA, an insured institution may not pay a dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. See “—Regulatory Remedies under the FDIA” above. Moreover, the Federal Reserve and the FDIC have issued policy statements stating that bank holding companies and insured banks should generally pay dividends only out of current operating earnings. Payment of Dividends by Regions Bank. Under the Federal Reserve’s Regulation H, Regions Bank may not, without approval of the Federal Reserve, declare or pay a dividend to Regions if the total of all dividends declared in a calendar year exceeds the total of (a) Regions Bank’s net income for that year and (b) its retained net income for the preceding two calendar years, less any required transfers to additional paid-in capital or to a fund for the retirement of preferred stock. Under Alabama law, Regions Bank may not pay a dividend in excess of 90 percent of its net earnings until the bank’s surplus is equal to at least 20 percent of capital. Regions Bank is also required by Alabama law to seek the approval of the Alabama Superintendent of Banking prior to the payment of dividends if the total of all dividends declared by Regions Bank in any calendar year will exceed the total of (a) Regions Bank’s net earnings for that year, plus (b) its retained net earnings for the preceding two years, less any required transfers to surplus. The statute defines net earnings as the remainder of all earnings from current operations plus actual recoveries on loans and investments and other assets, after deducting from the total thereof all current operating expenses, actual losses, accrued dividends on preferred stock, if any, and all federal, state and local taxes. Regions Bank cannot, without approval from the Federal Reserve and the Alabama Superintendent of Banking, declare or pay a dividend to Regions Financial unless Regions Bank is able to satisfy the criteria discussed above. In addition to dividend restrictions, Federal statutes also prohibit unsecured loans from banking subsidiaries to the parent company, as discussed below under “—Transactions with Affiliates”. Payment of Dividends by Regions. The payment of dividends by Regions and the dividend rate are subject to management review and approval by Regions’ Board of Directors on a quarterly basis. Regions’ dividend payments, as well as share repurchases, are also subject to the oversight of the Federal Reserve. Under a final rule issued by the Federal Reserve in November 2011, the dividend policies and share repurchases of a large bank holding company, such as Regions, will be reviewed by the Federal Reserve based on capital plans and stress tests as submitted by the bank holding company, and will be assessed against, among other things, the bank holding company’s ability to achieve the Basel III capital ratio requirements referred to above as they are phased in by U.S. regulators. Specifically, financial institutions must maintain a Tier 1 common risk-based capital ratio 15 greater than 5 percent, under both ordinary and adverse circumstances. The Federal Reserve will only approve capital distributions for companies whose capital plans adhere to the criteria described in the CCAR, as described above under “—Regulatory Reforms”. Support of Subsidiary Banks Under longstanding Federal Reserve policy which has been codified by the Dodd-Frank Act, Regions is expected to act as a source of financial strength to, and to commit resources to support, its subsidiary bank. This support may be required at times when Regions may not be inclined to provide it. In addition, any capital loans by a bank holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. Cross-Guarantee Provisions Each insured depository institution “controlled” (as defined in the BHC Act) by the same bank holding company can be held liable to the FDIC for any loss incurred, or reasonably expected to be incurred, by the FDIC due to the default of any other insured depository institution controlled by that holding company and for any assistance provided by the FDIC to any of those banks that is in danger of default. Such a cross-guarantee claim against a depository institution is generally superior in right of payment to claims of the holding company and its affiliates against that depository institution. At this time, Regions Bank is the only insured depository institution controlled by Regions for this purpose. If in the future, however, Regions were to control other insured depository institutions, such cross-guarantee claims would apply to all such insured depository institutions. Transactions with Affiliates There are various legal restrictions on the extent to which Regions and its non-bank subsidiaries may borrow or otherwise obtain funding from Regions Bank. In general, Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W require that any “covered transaction” by Regions Bank (or its subsidiaries) with an affiliate that is an extension of credit must be secured by designated amounts of specified collateral and must be limited to (a) in the case of any single such affiliate, the aggregate amount of covered transactions of Regions Bank and its subsidiaries may not exceed 10 percent of the capital stock and surplus of Regions Bank, and (b) in the case of all affiliates, the aggregate amount of covered transactions of Regions Bank and its subsidiaries may not exceed 20 percent of the capital stock and surplus of Regions Bank. “Covered transactions” are defined by statute to include, among other things, a loan or extension of credit, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the Federal Reserve) from the affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. The Dodd-Frank Act significantly expands the coverage and scope of the limitations on affiliate transactions within a banking organization. For example, commencing in July 2012, the Dodd-Frank Act requires that the 10% of capital limit on covered transactions begin to apply to financial subsidiaries. Commencing in July 2012, Dodd-Frank also expands the definition of a “covered transaction” to include derivatives transactions and securities lending transactions with a non-bank affiliate under which a bank (or a subsidiary) has credit exposure (with the term “credit exposure” to be defined by the Federal Reserve under its existing rulemaking authority). Collateral requirements will apply to such transactions as well as to certain repurchase and reverse repurchase agreements. All covered transactions, including certain additional transactions (such as transactions with a third party in which an affiliate has a financial interest), must be conducted on market terms. Deposit Insurance Regions Bank accepts deposits, and those deposits have the benefit of FDIC insurance up to the applicable limits. The applicable limit for FDIC insurance for most types of accounts is $250,000. For noninterest-bearing transactions accounts there is temporary unlimited coverage through December 31, 2012, during which time all 16 funds held in noninterest-bearing transaction accounts are fully insured, without limit, and this coverage is separate from, and in addition to, the coverage provided to depositors for other accounts at Regions Bank. Under the FDIA, insurance of deposits may be terminated by the FDIC upon a finding that the insured depository institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by a bank’s federal regulatory agency. Deposit Insurance Assessments. Regions Bank pays deposit insurance premiums to the FDIC based on an assessment rate established by the FDIC. Regions’ FDIC assessment rates were previously calculated based upon a combination of regulatory ratings and financial ratios. However, In February 2011, the FDIC adopted a final rule (the “New Assessment Rule”), which took effect on April 1, 2011, to revise the deposit insurance assessment system for large institutions. The New Assessment Rule creates a two scorecard system for large institutions, one for most large institutions that have more than $10 billion in assets, such as Regions Bank, and another for “highly complex” institutions that have over $50 billion in assets and are fully owned by a parent with over $500 billion in assets. Each scorecard will have a performance score and a loss-severity score that will be combined to produce a total score, which will be translated into an initial assessment rate. In calculating these scores, the FDIC utilizes the bank’s supervisory (CAMELS) ratings as well as forward-looking financial measures to assess an institution’s ability to withstand asset-related stress and funding-related stress. The FDIC has the ability to make discretionary adjustments to the total score, up or down, based upon significant risk factors that are not adequately captured in the scorecard. The total score will then translate to an initial base assessment rate on a non-linear, sharply-increasing scale. For large institutions, including Regions Bank, the initial base assessment rate ranges from 5 to 35 basis points on an annualized basis (basis points representing cents per $100). After the effect of potential base-rate adjustments, the total base assessment rate could range from 2.5 to 45 basis points on an annualized basis. The potential adjustments to an institution’s initial base assessment rate include (i) a potential decrease of up to 5 basis points for certain long-term unsecured debt (“unsecured debt adjustment”) and (ii) (except for well-capitalized institutions with a CAMELS rating of 1 or 2) a potential increase of up to 10 basis points for brokered deposits in excess of 10% of domestic deposits (“brokered deposit adjustment”). As the DIF reserve ratio grows, the rate schedule will be adjusted downward. Additionally, the rule includes a new adjustment for depository institution debt whereby an institution will pay an additional premium equal to 50 basis points on every dollar (above 3% of an institution’s Tier 1 capital) of long-term, unsecured debt held that was issued by another insured depository institution, excluding debt guaranteed under the FDIC’s Temporary Liquidity Guarantee Program (TLGP). The New Assessment Rule also changed the deposit insurance assessment base from deposits to the average of consolidated total assets less the average tangible equity of the insured depository institution during the assessment period. Regions began using the New Assessment Rule for FDIC expense calculations beginning with the second quarter of 2011. During 2011, FDIC insurance expense decreased $3 million to $217 million. The level of FDIC deposit expense is expected to fluctuate over time depending on the results of the calculations using the factors discussed above. On November 17, 2009, the FDIC implemented a final rule requiring insured institutions, such as Regions Bank, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012. Such prepaid assessments were paid on December 30, 2009, along with each institution’s quarterly risk-based deposit insurance assessment for the third quarter of 2009 (assuming 5 percent annual growth in deposits between the third quarter of 2009 and the end of 2012 and taking into account, for 2011 and 2012, the annualized three basis point increase discussed below). The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis. The FDIA establishes a minimum ratio of deposit insurance reserves to estimated insured deposits, the designated reserve ratio (the “DRR”), of 1.15 percent prior to September 2020 and 1.35 percent thereafter. On December 20, 2010, the FDIC issued a final rule setting the DRR at 2 percent. Because the DRR fell below 1.15 percent as of June 30, 2008, and was expected to remain below 1.15 percent, the FDIC was required to establish and implement a restoration plan that would restore the reserve ratio to at least 1.15 percent within five years. In October 2008, the FDIC adopted such a restoration plan (the “Restoration Plan”). In February 2009, in light of 17 the extraordinary challenges facing the banking industry, the FDIC amended the Restoration Plan to allow seven years for the reserve ratio to return to 1.15 percent. In October 2009, the FDIC passed a final rule extending the term of the Restoration Plan to eight years. This final rule also included a provision that implements a uniform three basis point increase in assessment rates, effective January 1, 2011, to help ensure that the reserve ratio returns to at least 1.15 percent within the eight year period called for by the Restoration Plan. In October 2010, the FDIC adopted a new restoration plan to ensure the DRR reaches 1.35 percent by September 2020. As part of the revised plan, the FDIC did not implement the uniform three-basis point increase in assessment rates that was scheduled to take place in January 2011. The FDIC will, at least semi-annually, update its income and loss projections for the DIF and, if necessary, propose rules to further increase assessment rates. In addition, on January 12, 2010, the FDIC announced that it would seek public comment on whether banks with compensation plans that encourage risky behavior should be charged higher deposit assessment rates than such banks would otherwise be charged. See also “—Incentive Compensation” below. We cannot predict whether, as a result of an adverse change in economic conditions or other reasons, the FDIC will in the future further increase deposit insurance assessment levels. For more information, see the “FDIC Premiums and Special Assessment” section of Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operation” of this Annual Report on Form 10-K. FICO Assessments. In addition, the Deposit Insurance Funds Act of 1996 authorized the Financing Corporation (“FICO”) to impose assessments on DIF applicable deposits in order to service the interest on FICO’s bond obligations from deposit insurance fund assessments. The amount assessed on individual institutions by FICO will be in addition to the amount, if any, paid for deposit insurance according to the FDIC’s risk-related assessment rate schedules. FICO assessment rates may be adjusted quarterly to reflect a change in assessment base. Regions Bank had a FICO assessment of $9 million in FDIC deposit premiums in 2011. Acquisitions The BHC Act requires every bank holding company to obtain the prior approval of the Federal Reserve before: (1) it may acquire direct or indirect ownership or control of any voting shares of any bank or savings and loan association, if after such acquisition, the bank holding company will directly or indirectly own or control 5 percent or more of the voting shares of the institution; (2) it or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of any bank or savings and loan association; or (3) it may merge or consolidate with any other bank holding company. Effective July 2011, financial holding companies and bank holding companies with consolidated assets exceeding $50 billion must (i) obtain prior approval from the Federal Reserve before acquiring certain nonbank financial companies with assets exceeding $10 billion and (ii) provide prior written notice to the Federal Reserve before acquiring direct or indirect ownership or control of any voting shares of any company having consolidated assets of $10 billion or more. Bank holding companies seeking approval to complete an acquisition must be well-capitalized and well-managed effective July 2011. The BHC Act further provides that the Federal Reserve may not approve any transaction that would result in a monopoly or would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any section of the United States, or the effect of which may be substantially to lessen competition or to tend to create a monopoly in any section of the country, or that in any other manner would be in restraint of trade, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served. Consideration of financial resources generally focuses on capital adequacy, and consideration of convenience and needs issues includes the parties’ performance under the CRA, both of which are discussed below. The Federal Reserve must also take into account the institutions’ effectiveness in combating money laundering. In addition, pursuant to the Dodd-Frank Act, the BHC Act was amended to require the Federal Reserve to, when evaluating a proposed transaction, consider the extent to which the transaction would result in greater or more concentrated risks to the stability of the United States banking or financial system. 18 U.S. Treasury Capital Purchase Program Pursuant to the CPP, on November 14, 2008, Regions issued and sold to the U.S. Treasury in a private offering, (i) 3.5 million shares of the Fixed Rate Cumulative Perpetual Preferred Stock, (“Series A Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 48,253,677 shares of Regions’ common stock, at an exercise price of $10.88 per share, subject to certain anti-dilution and other adjustments, for an aggregate purchase price of $3.5 billion in cash. The securities purchase agreement, dated November 14, 2008, pursuant to which the securities issued to the U.S. Treasury under the CPP were sold, grants the holders of the Series A Preferred Stock, the Warrant and the common stock of Regions to be issued under the Warrant certain registration rights in order to facilitate resale, and subjects Regions to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (“EESA”), as amended by the American Recovery and Reinvestment Act of 2009 (“ARRA”). Depositor Preference Under federal law, depositors and certain claims for administrative expenses and employee compensation against an insured depository institution would be afforded a priority over other general unsecured claims against such an institution in the “liquidation or other resolution” of such an institution by any receiver. Incentive Compensation Guidelines adopted by the federal banking agencies pursuant to the FDIA prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In January 2010, the FDIC announced that it would seek public comment on whether banks with compensation plans that encourage risky behavior should be charged higher deposit assessment rates than such banks would otherwise be charged. The comment period ended on February 18, 2010. As of February 2012, a final rule has not been adopted. In June 2010, the Federal Reserve issued comprehensive guidance on incentive compensation policies (the “Incentive Compensation Guidance”) intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk- taking. The Incentive Compensation Guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. Any deficiencies in compensation practices that are identified may be incorporated into the organization’s supervisory ratings, which can affect its ability to make acquisitions or perform other actions. The Incentive Compensation Guidance provides that enforcement actions may be taken against a banking organization if its incentive compensation arrangements or related risk-management control or governance processes pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies. In March 2011, the Federal Reserve and other federal banking agencies requested comments on a notice of proposed rulemaking designed to implement provisions of the Dodd-Frank Act prohibiting incentive compensation arrangements that would encourage inappropriate risk taking at a covered institution, which includes a bank or bank holding company with $1 billion or more of assets, such as Regions and Regions Bank. The proposed rule (i) prohibits incentive-based compensation arrangements that encourage executive officers, employees, directors or principal shareholders to expose the institution to inappropriate risks by providing excessive compensation (based on the standards for excessive compensation adopted pursuant to the FDIA) and 19 (ii) prohibits incentive-based compensation arrangements for executive officers, employees, directors or principal shareholders that could lead to a material financial loss for the institution. The proposed rule requires covered institutions to establish policies and procedures for monitoring and evaluating their compensation practices. Institutions with consolidated assets of $50 billion or more, such as Regions, are subject to additional restrictions on compensation arrangements for their executive officers and any other persons indentified by the institution’s board of directors as having the ability to expose the institution to substantial losses. The comment period ended on May 31, 2011. These regulations may become effective before the end of 2012. If the regulations are adopted in the form initially proposed, they will impose limitations on the manner in which we may structure compensation for our executives. The scope and content of the U.S. banking regulators’ policies on incentive compensation are continuing to develop. It cannot be determined at this time whether a final rule will be adopted and whether compliance with such a final rule will adversely affect the ability of Regions and its subsidiaries to hire, retain and motivate their key employees. Financial Privacy The federal banking regulators have adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a non-affiliated third party. These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. In addition, consumers may also prevent disclosure of certain information among affiliated companies that is assembled or used to determine eligibility for a product or service, such as that shown on consumer credit reports and asset and income information from applications. Consumers also have the option to direct banks and other financial institutions not to share information about transactions and experiences with affiliated companies for the purpose of marketing products or services. Community Reinvestment Act Regions Bank is subject to the provisions of the CRA. Under the terms of the CRA, Regions Bank has a continuing and affirmative obligation consistent with safe and sound operation to help meet the credit needs of its communities, including providing credit to individuals residing in low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires each appropriate federal bank regulatory agency, in connection with its examination of a depository institution, to assess such institution’s record in assessing and meeting the credit needs of the community served by that institution, including low- and moderate- income neighborhoods. The regulatory agency’s assessment of the institution’s record is made available to the public. The assessment also is part of the Federal Reserve’s consideration of applications to acquire, merge or consolidate with another banking institution or its holding company, to establish a new branch office that will accept deposits or to relocate an office. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve will assess the records of each subsidiary depository institution of the applicant bank holding company, and such records may be the basis for denying the application. Regions Bank received a “satisfactory” CRA rating in its most recent examination. USA PATRIOT Act A focus of governmental policy relating to financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (the “USA PATRIOT Act”) broadened the application of anti-money laundering regulations to apply to additional types of financial institutions such as broker-dealers, investment advisors and insurance companies, and strengthened the ability of 20 the U.S. Government to help prevent, detect and prosecute international money laundering and the financing of terrorism. The principal provisions of Title III of the USA PATRIOT Act require that regulated financial institutions, including state member banks: (i) establish an anti-money laundering program that includes training and audit components; (ii) comply with regulations regarding the verification of the identity of any person seeking to open an account; (iii) take additional required precautions with non-U.S. owned accounts; and (iv) perform certain verification and certification of money laundering risk for their foreign correspondent banking relationships. Failure of a financial institution to comply with the USA PATRIOT Act’s requirements could have serious legal and reputational consequences for the institution. Regions’ banking, broker-dealer and insurance subsidiaries have augmented their systems and procedures to meet the requirements of these regulations and will continue to revise and update their policies, procedures and controls to reflect changes required by the USA PATRIOT Act and implementing regulations. Office of Foreign Assets Control Regulation The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are typically known as the “OFAC” rules based on their administration by the U.S. Treasury Department Office of Foreign Assets Control (“OFAC”). The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to, making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences. Regulation of Insurers and Insurance Brokers Regions’ operations in the areas of insurance brokerage and reinsurance of credit life insurance are subject to regulation and supervision by various state insurance regulatory authorities. Although the scope of regulation and form of supervision may vary from state to state, insurance laws generally grant broad discretion to regulatory authorities in adopting regulations and supervising regulated activities. This supervision generally includes the licensing of insurance brokers and agents and the regulation of the handling of customer funds held in a fiduciary capacity. Certain of Regions’ insurance company subsidiaries are subject to extensive regulatory supervision and to insurance laws and regulations requiring, among other things, maintenance of capital, record keeping, reporting and examinations. Regulation of Residential Mortgage Loan Originators On July 28, 2010, the Federal Reserve and other Federal bank regulatory authorities adopted a final rule on the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (“S.A.F.E. Act”). Under the S.A.F.E. Act, residential mortgage loan originators employed by banks, such as Regions Bank, must register with the Nationwide Mortgage Licensing System and Registry, obtain a unique identifier from the registry, and maintain their registration. As of July 30, 2011, any residential mortgage loan originator who fails to satisfy these requirements will not be permitted to originate residential mortgage loans. Regulation of Morgan Keegan Morgan Keegan is subject to regulation and examination by the SEC, FINRA, NYSE and other SROs. Such regulations cover a broad range of subject matter. Rules and regulations for registered broker-dealers cover such issues as: capital requirements; sales and trading practices; use of client funds and securities; the conduct of 21 directors, officers and employees; record-keeping and recording; supervisory procedures to prevent improper trading on material non-public information; qualification and licensing of sales personnel; and limitations on the extension of credit in securities transactions. Rules and regulations for registered investment advisers include limitations on the ability of investment advisers to charge performance-based or non-refundable fees to clients, record-keeping and reporting requirements, disclosure requirements, limitations on principal transactions between an adviser or its affiliates and advisory clients, and anti-fraud standards. Morgan Keegan is subject to the net capital requirements set forth in Rule 15c3-1 of the Securities Exchange Act of 1934. The net capital requirements measure the general financial condition and liquidity of a broker-dealer by specifying a minimum level of net capital that a broker-dealer must maintain, and by requiring that a significant portion of its assets be kept liquid. If Morgan Keegan failed to maintain its minimum required net capital, it would be required to cease executing customer transactions until it came back into compliance. This could also result in Morgan Keegan losing its FINRA membership, its registration with the SEC or require a complete liquidation. The SEC’s risk assessment rules also apply to Morgan Keegan as a registered broker-dealer. These rules require broker-dealers to maintain and preserve records and certain information, describe risk management policies and procedures, and report on the financial condition of affiliates whose financial and securities activities are reasonably likely to have a material impact on the financial and operational condition of the broker-dealer. Certain “material associated persons” of Morgan Keegan, as defined in the risk assessment rules, may also be subject to SEC regulation. In addition to federal registration, state securities commissions require the registration of certain broker- dealers and investment advisers. Morgan Keegan is registered as a broker-dealer with every state, the District of Columbia, and Puerto Rico. Morgan Keegan is registered as an investment adviser in 47 states and the District of Columbia. Violations of federal, state and SRO rules or regulations may result in the revocation of broker-dealer or investment adviser licenses, imposition of censures or fines, the issuance of cease and desist orders, and the suspension or expulsion of officers and employees from the securities business firm. The Dodd-Frank Act contains several provisions which may affect Morgan Keegan’s business, including registration of municipal advisors, increased regulation of investment advisors and conducting a study regarding the fiduciary duties of investment advisors. Morgan Keegan’s business may be adversely affected by new rules and regulations issued by the SEC or SROs, the implementation of provisions of the Dodd-Frank Act applicable to Morgan Keegan, and any changes in the enforcement of existing laws and rules that affect its securities business. Competition All aspects of Regions’ business are highly competitive. Regions’ subsidiaries compete with other financial institutions located in the states in which they operate and other adjoining states, as well as large banks in major financial centers and other financial intermediaries, such as savings and loan associations, credit unions, consumer finance companies, brokerage firms, insurance companies, investment companies, mutual funds, mortgage companies and financial service operations of major commercial and retail corporations. Regions expects competition to intensify among financial services companies due to the recent consolidation of certain competing financial institutions and the conversion of certain investment banks to bank holding companies. Customers for banking services and other financial services offered by Regions’ subsidiaries are generally influenced by convenience, quality of service, personal contacts, price of services and availability of products. Although Regions’ position varies in different markets, Regions believes that its affiliates effectively compete with other financial services companies in their relevant market areas. 22 Employees As of December 31, 2011, Regions and its subsidiaries had 26,813 employees. Available Information Regions maintains a website at www.regions.com. Regions makes available on its website free of charge its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports which are filed with or furnished to the SEC pursuant to Section 13(a) of the Securities Exchange Act of 1934. These documents are made available on Regions’ website as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Also available on the website are Regions’ (i) Corporate Governance Principles, (ii) Code of Business Conduct and Ethics, (iii) Code of Ethics for Senior Financial Officers, (iv) Expenditures Policy, and (v) the charters of its Nominating and Corporate Governance Committee, Audit Committee, Compensation Committee and Risk Committee. Item 1A. Risk Factors Risks Related to the Operation of Our Business Our businesses have been and may continue to be adversely affected by conditions in the financial markets and economic conditions generally. The capital and credit markets since 2008 have experienced unprecedented levels of volatility and disruption. In some cases, the markets produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. Dramatic declines in the housing market during recent years, with falling home prices and increasing foreclosures, unemployment and under-employment, have adversely affected the credit performance of real estate-related loans and resulted in, and may continue to result in, significant write-downs of asset values by us and other financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other securities and loans, have caused many financial institutions to seek additional capital, to reduce or eliminate dividends, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced, and in some cases, ceased to provide funding to borrowers, including financial institutions. Although the economic slowdown that the United States experienced has begun to reverse and the markets have generally improved, business activities across a wide range of industries continue to face serious difficulties due to the lack of consumer spending and the lack of liquidity in the global credit markets. A sustained weakness or weakening in business and economic conditions generally or specifically in the principal markets in which we do business could have one or more of the following adverse effects on our business: • • • • • A decrease in the demand for loans and other products and services offered by us; A decrease in the value of our loans held for sale or other assets secured by consumer or commercial real estate; An impairment of certain intangible assets, such as goodwill; A decrease in interest income from variable rate loans, due to fluctuations in interest rates; and An increase in the number of clients and counterparties who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to us. An increase in the number of delinquencies, bankruptcies or defaults could result in a higher level of nonperforming assets, net charge-offs, provisions for loan losses, and valuation adjustments on loans held for sale. 23 Overall, during the past four years, the general business environment has had an adverse effect on our business. Although the general business environment has shown some improvement, there can be no assurance that it will continue to improve. Additionally, the improvement of certain economic indicators, such as real estate asset values and rents and unemployment, may vary between geographic markets and may continue to lag behind improvement in the overall economy. These economic indicators typically affect certain industries, such as real estate and financial services, more significantly than other economic sectors. For example, improvements in commercial real estate fundamentals typically lag broad economic recovery by twelve to eighteen months. Our clients include entities active in the real estate and financial services industries. Furthermore, financial services companies with a substantial lending business, like ours, are dependent upon the ability of their borrowers to make debt service payments on loans. Should unemployment or real estate asset values fail to recover for an extended period of time, our business, financial condition or results of operations could be adversely affected. If economic conditions worsen or remain volatile, our business, financial condition and results of operations could be adversely affected. Concerns about the European Union’s sovereign debt crisis have also caused uncertainty for financial markets globally. Such risks could indirectly affect the Company by affecting its hedging or other counterparties, as well as the Company’s customers with European businesses or assets denominated in the euro or companies in the Company’s markets with European businesses or affiliates. Ineffective liquidity management could adversely affect our financial results and condition. Effective liquidity management is essential for the operation of our business. We require sufficient liquidity to meet customer loan requests, customer deposit maturities/withdrawals, payments on our debt obligations as they come due and other cash commitments under both normal operating conditions and other unpredictable circumstances causing industry or general financial market stress. Our access to funding sources in amounts adequate to finance our activities or on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy generally. Factors that could detrimentally impact our access to liquidity sources include a downturn in the geographic markets in which our loans and operations are concentrated or difficult credit markets. Our access to deposits may also be affected by the liquidity needs of our depositors. In particular, a majority of our liabilities on average during 2011 were checking accounts and other liquid deposits, which are payable on demand or upon several days’ notice, while by comparison, a substantial majority of our assets were loans, which cannot be called or sold in the same time frame. Although we have historically been able to replace maturing deposits and advances as necessary, we might not be able to replace such funds in the future, especially if a large number of our depositors seek to withdraw their accounts, regardless of the reason. A failure to maintain adequate liquidity could materially and adversely affect our business, results of operations or financial condition. Our operations are concentrated in the Southeastern United States, and adverse changes in the economic conditions in this region can adversely affect our performance and credit quality. Our operations are concentrated in the Southeastern United States, particularly in the states of Alabama, Arkansas, Georgia, Florida, Louisiana, Mississippi and Tennessee. As a result, local economic conditions in the Southeastern United States can significantly affect the demand for the products offered by Regions Bank (including real estate, commercial and construction loans), the ability of borrowers to repay these loans and the value of the collateral securing these loans. Since 2008, the national real estate market experienced a significant decline in value, and the value of real estate in the Southeastern United States in particular declined significantly more than real estate values in the United States as a whole. This decline has had an adverse impact on some of our borrowers and on the value of the collateral securing many of our loans. This decline may continue to affect borrowers and collateral values, which could adversely affect our currently performing loans, leading to future delinquencies or defaults and increases in our provision for loan losses. Further or continued adverse changes in these economic conditions may negatively affect our business, results of operations or financial condition. 24 Hurricanes and other weather-related events, as well as man-made disasters, could cause a disruption in our operations or other consequences that could have an adverse impact on our results of operations. A significant portion of our operations are located in the areas bordering the Gulf of Mexico and the Atlantic Ocean, regions that are susceptible to hurricanes, or in areas of the Southeastern United States that are susceptible to tornadoes and other severe weather events. Such weather events can cause disruption to our operations and could have a material adverse effect on our overall results of operations. We maintain hurricane insurance, including coverage for lost profits and extra expense; however, there is no insurance against the disruption that a catastrophic hurricane could produce to the markets that we serve. Further, a hurricane or severe tornado in any of our market areas could adversely impact the ability of borrowers to timely repay their loans and may adversely affect the value of any collateral held by us. Man-made disasters and other events connected with the Gulf of Mexico or Atlantic Ocean, such as the 2010 Gulf oil spill, could have similar effects. Some of the states in which we operate have in recent years experienced extreme droughts. The severity and impact of future hurricanes, severe tornadoes, droughts and other weather-related events are difficult to predict and may be exacerbated by global climate change. The effects of past or future hurricanes, severe tornadoes, droughts and other weather-related events, as well as man-made disasters, could have an adverse effect on our business, financial condition or results of operations. Continued weakness in the residential real estate markets could adversely affect our performance. As of December 31, 2011, consumer residential real estate loans represented approximately 34.5 percent of our total loan portfolio. This portion of our loan portfolio has been under pressure for over four years as recent disruptions in the financial markets and the deterioration in housing markets and general economic conditions have caused a decline in home values, real estate market demand and the credit quality of borrowers. The effects of the continuing mortgage market challenges, combined with decreases in residential real estate market prices and demand, could result in further declines in home values. Declines in home values would adversely affect the value of collateral securing the residential real estate that we hold, as well as the volume of loan originations and the amount we realize on sale of real estate loans. These factors could result in higher delinquencies and greater charge-offs in future periods, which could materially adversely affect our business, financial condition or results of operations. Continued weakness in the commercial real estate markets could adversely affect our performance. Facing continuing pressure from reduced asset values, rising vacancies and reduced rents, the fundamentals within the commercial real estate sector also remain weak. As of December 31, 2011, approximately 13.8 percent of our loan portfolio consisted of investor real estate loans. The properties securing income-producing investor real estate loans are typically not fully leased at the origination of the loan. The borrower’s ability to repay the loan is instead dependent upon additional leasing through the life of the loan or the borrower’s successful operation of a business. Weak economic conditions may impair a borrower’s business operations and typically slow the execution of new leases. Such economic conditions may also lead to existing lease turnover. As a result of these factors, vacancy rates for retail, office and industrial space may remain at elevated levels in 2012. High vacancy rates could result in rents falling further over the next several quarters. The combination of these factors could result in further deterioration in the fundamentals underlying the commercial real estate market and the deterioration in value of some of our loans. Any such deterioration could adversely affect the ability of our borrowers to repay the amounts due under their loans. As a result, our business, results of operations or financial condition may be adversely affected. If we experience greater credit losses in our loan portfolios than anticipated, our earnings may be adversely affected. As a lender, we are exposed to the risk that our customers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans may not be sufficient to assure repayment. Credit losses are inherent in the business of making loans and could have a material adverse effect on our operating results. 25 We make various assumptions and judgments about the collectability of our loan portfolio and provide an allowance for estimated credit losses based on a number of factors. Our management periodically determines the allowance for loan losses based on available information, including the quality of the loan portfolio, economic conditions, the value of the underlying collateral and the level of non-accrual loans. Increases in this allowance will result in an expense for the period reducing our reported net income. If, as a result of general economic conditions, a decrease in asset quality or growth in the loan portfolio, our management determines that additional increases in the allowance for loan losses are necessary, we may incur additional expenses which will reduce our net income, and our business, results of operations or financial condition may be materially and adversely affected. Although our management will establish an allowance for loan losses it believes is appropriate to absorb probable and reasonable estimable losses in our loan portfolio, this allowance may not be adequate. In particular, if a hurricane or other natural disaster were to occur in one of our principal markets of if economic conditions in those markets were to deteriorate unexpectedly, additional loan losses not incorporated in the existing allowance for loan losses may occur. Losses in excess of the existing allowance for loan losses will reduce our net income and could adversely affect our business, results of operations or financial condition, perhaps materially. In addition, bank regulatory agencies will periodically review our allowance for loan losses and the value attributed to non-accrual loans or to real estate acquired through foreclosure. Such regulatory agencies may require us to adjust our determination of the value for these items. These adjustments could adversely affect our business, results of operations or financial condition. Risks associated with home equity products where we are in a second lien position could adversely affect our performance. Home equity products, particularly those where we are in a second lien position, and particularly those in certain geographic areas, may carry a higher risk of non-collection than other loans. Home equity lending includes both home equity loans and lines of credit. Of the $13.0 billion home equity portfolio at December 31, 2011, approximately $11.6 billion were home equity lines of credit and $1.4 billion were closed-end home equity loans (primarily originated as amortizing loans). This type of lending, which is secured by a first or second mortgage on the borrower’s residence, allows customers to borrow against the equity in their home. Real estate market values at the time of origination directly affect the amount of credit extended, and, in addition, past and future changes in these values impact the depth of potential losses. Second lien position lending carries higher credit risk because any decrease in real estate pricing may result in the value of the collateral being insufficient to cover the second lien after the first lien position has been satisfied. We have realized higher levels of charge-offs on second lien positions in the state of Florida, where real estate valuations have been depressed over the past several years. As of December 31, 2011, approximately $7.1 billion of our home equity lines and loans were in a second lien position (approximately $2.8 billion in Florida). We are unable to track payment status on first liens held by another institution, including payment status related to loan modifications. When our second lien position becomes delinquent, an attempt is made to contact the first lien holder and inquire as to the payment status of the first lien. However, we do not and cannot continuously monitor the payment status of the first lien position. When the first lien is held by a third party, we can obtain an indication that a first lien is in default through information reported to credit bureaus. However, because borrowers may have more than one mortgage reported on the credit report and there is not a corresponding property address associated with reported mortgages, we are unable to associate a specific first lien with our junior lien. The only communication we receive directly from the first lien holder for our junior lien is notification at the time of foreclosure sale. As of December 31, 2011, none of our home equity lines of credit have converted to mandatory amortization under the contractual terms. The vast majority of home equity lines of credit will convert to amortizing status after fiscal year 2020. 26 Industry competition may have an adverse effect on our success. Our profitability depends on our ability to compete successfully. We operate in a highly competitive environment. Certain of our competitors are larger and have more resources than we do, enabling them to be more aggressive than us in competing for loans and deposits. In our market areas, we face competition from other commercial banks, savings and loan associations, credit unions, internet banks, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, and other financial intermediaries that offer similar services. Some of our non-bank competitors are not subject to the same extensive regulations that govern Regions or Regions Bank and may have greater flexibility in competing for business. We expect competition to intensify among financial services companies due to the recent consolidation of certain competing financial institutions and the conversion of certain investment banks to bank holding companies. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes, such as the recent repeal of all federal prohibitions on the payment by depository institutions of interest on demand deposit accounts and the recent repeal of all prohibitions on interstate branching by depository institutions. Should competition in the financial services industry intensify, our ability to effectively market our products and services and to retain or compete for new business may be adversely affected. Consequently, our business, financial condition or results of operations may also be adversely affected, perhaps materially. Rapid and significant changes in market interest rates may adversely affect our performance. Fluctuations in interest rates may adversely impact our business. Our profitability depends to a large extent on our net interest income, which is the difference between the interest income received on interest-earning assets (primarily loans and investment securities) and the interest expense incurred in connection with interest- bearing liabilities (primarily deposits and borrowings). The level of net interest income is primarily a function of the average balance of interest-earning assets, the average balance of interest-bearing liabilities and the spread between the yield on such assets and the cost of such liabilities. These factors are influenced by both the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as the local economy, competition for loans and deposits, the monetary policy of the Federal Open Market Committee of the Federal Reserve System (the “FOMC”) and market interest rates. The cost of our deposits and short-term wholesale borrowings is largely based on short-term interest rates, the level of which is driven primarily by the FOMC’s actions. However, the yields generated by our loans and securities are typically driven by longer-term interest rates, which are set by the market through benchmark interest rates such as the London Interbank Offered Rates (“LIBOR”) or, at times the FOMC’s actions, and generally vary from day to day. The level of net interest income is therefore influenced by movements in such interest rates and the pace at which such movements occur. Interest rate volatility can reduce unrealized gains or create unrealized losses in our portfolios. If the interest rates on our interest-bearing liabilities increase at a faster pace than the interest rates on our interest-earning assets, our net interest income may decline and, with it, a decline in our earnings may occur. Our net interest income and earnings would be similarly affected if the interest rates on our interest-earning assets declined at a faster pace than the interest rates on our interest-bearing liabilities. In particular, short-term interest rates are currently very low by historical standards, with many benchmark rates, such as the federal funds rate and the one- and three-month LIBOR near zero. These low rates have reduced our cost of funding which has caused our net interest margin to increase. Our current one-year interest rate sensitivity position is asset sensitive, meaning that an immediate or gradual increase in interest rates would likely have a positive cumulative impact on Regions’ twelve-month net interest income. Alternatively, an immediate or gradual decrease in rates over a twelve-month period would likely have a negative impact on twelve-month net interest income. An increasing interest rate environment would also increase debt service requirements for some of our borrowers. Such increases may adversely affect those borrowers’ ability to pay as contractually obligated and could result in additional delinquencies or charge-offs. Our results of operations and financial condition may be adversely affected as a result. 27 For a more detailed discussion of these risks and our management strategies for these risks, see the “Net Interest Income and Margin”, “Market Risk – Interest Rate Risk” and “Securities” sections of Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operation” of this Annual Report on Form 10-K. Our status as a non-investment grade issuer and any future reductions in our credit ratings may increase our funding costs, place limitations on business activities related to providing credit support to customers, or contribute to ineffective liquidity management. The major rating agencies regularly evaluate us and their ratings of our long-term debt are based on a number of factors, including our financial strength and conditions affecting the financial services industry generally. Over the past three years, all of the major ratings agencies downgraded Regions’ and Regions Bank’s credit ratings and many issued negative outlooks. Negative watch, negative outlook or other similar terms mean that a future downgrade is possible. Recently, however, three major rating agencies have revised their outlooks of Regions upward from negative to stable. Citing improvements in loan loss performance and profitability, Standard & Poor’s revised its outlook of Regions to stable in August 2011. Fitch Ratings followed suit in November 2011, noting that Regions’ overall risk profile had improved. In February 2012, Moody’s Investor Services also changed its outlook from negative to stable citing that Regions had decreased its risk concentrations and is showing signs of stability in its asset quality. However, our rating from Dominion Bond Rating Service remains on negative outlook. Currently, Regions’ Senior ratings are Ba3, BB+, BBB-, and BBB by Moody’s Investor Services, Standard & Poor’s, Fitch Ratings and Dominion Bond Rating Service, respectively. Regions’ ratings with Moody’s Investor Services and Standard & Poor’s and Regions Bank’s ratings with Moody’s Investor Services are currently below investment grade. In general, ratings agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix and level and quality of earnings, and we may not be able to maintain our current credit ratings. The ratings assigned to Regions and Regions Bank remain subject to change at any time, and it is possible that any ratings agency will take action to downgrade Regions, Regions Bank or both in the future. Additionally, ratings agencies may also make substantial changes to their ratings policies and practices which may affect our credit ratings. In particular, Standard & Poor’s recently issued new credit rating criteria for regional banks based on general economic risks, risks associated with the banking industry, the bank’s strengths and weaknesses, and the likelihood that the bank will need governmental or outside financial support. While Standard & Poor’s has not downgraded Regions’ and Regions Bank’s credit ratings at this time, a few of our peer banks have experienced credit downgrades as a result of the new rating criteria. In the future, these new ratings guidelines may, among other things, adversely affect the ratings of our securities or other securities in which we have an economic interest. Downgrades of Regions’ credit ratings have negative consequences that can impact our ability to access the debt and capital markets, as well as reduce our profitability through increased costs on future debt issuances. Specifically, when Regions was downgraded below investment grade status, we became unable to reliably access the short-term unsecured funding markets, which has caused us to hold more cash and liquid investments to meet our on-going cash needs. Such actions have reduced our profitability as these liquid investments earn a lower return than other assets, such as loans. Regions’ liquidity policy requires that we maintain a minimum cash level sufficient to cover debt service, maturities and operating cash requirements for two years for the parent company and acceptable periods for the bank and other affiliates. The conservative nature of this policy helps protect us against the costs of unexpected adverse funding environments. Future issuances of debt could cost Regions more in interest costs were such debt to be issued at our current debt rating. Future downgrades would further increase the interest costs associated with potential future borrowings, the cost of which cannot be estimated due to the uncertainty of future issuances in terms of amount and priority. 28 Additionally, at the time Regions was downgraded to below investment grade, certain counterparty contracts were required to be renegotiated, resulting in additional collateral postings of approximately $200 million. Refer to Note 20, “Derivative Financial Instruments and Hedging Activities, Contingent Features” to the consolidated financial statements of this Annual Report on Form 10-K for the fair value of contracts subject to contingent credit features and the collateral postings associated with such contracts. Future downgrades could require Regions to post additional collateral. While the exact amount of additional collateral is unknown, it is reasonable to conclude that Regions may be required to post approximately an additional $200 million related to existing contracts with contingent credit features. Additionally, if due to future downgrades, we were required to cancel our derivatives contracts with certain counterparties and were unable to replace such contracts, our market risk profile could be altered. Regions believes that this market risk exposure would be immaterial to its consolidated financial position, liquidity and results of operations. The value of our goodwill and other intangible assets may decline in the future. As of December 31, 2011, we had $4.8 billion of goodwill and $449 million of other intangible assets. A significant decline in our expected future cash flows, a significant adverse change in the business climate, slower growth rates or a significant and sustained decline in the price of our common stock, any or all of which could be materially impacted by many of the risk factors discussed herein, may necessitate our taking charges in the future related to the impairment of our goodwill. Future regulatory actions could also have a material impact on assessments of goodwill for impairment. If the fair value of our net assets improves at a faster rate than the market value of our Banking/Treasury reporting unit, we may also have to take charges related to the impairment of our goodwill. If we were to conclude that a future write-down of our goodwill and other intangible assets is necessary, we would record the appropriate charge, which could have a material adverse effect on our results of operations. Additionally, as a result of the potential sale of Morgan Keegan, Regions is evaluating the organization of its reporting units. Reorganization of its reporting units in the future would result in a reallocation of goodwill across Regions’ business, at which time Regions would be required to test its goodwill in these new reporting units for impairment and could result in a write-down of our goodwill. A goodwill impairment charge is a non-cash item that does not have an adverse impact on regulatory capital. The value of our deferred tax assets could adversely affect our operating results and regulatory capital ratios. As of December 31, 2011, Regions had approximately $1.3 billion in net deferred tax assets, of which $432 million was disallowed when calculating regulatory capital. Applicable banking regulations permit us to include these deferred tax assets, up to a maximum amount, when calculating Regions’ regulatory capital to the extent these assets will be realized based on future projected earnings within one year of the report date. The ability to realize these deferred tax assets during any year also includes the ability to apply these assets to offset any taxable income during the two previous years. Unless we anticipate generating sufficient taxable income in the future, we may be unable to include additional amounts related to our deferred tax assets as part of our regulatory capital. The inability to include deferred tax assets in our regulatory capital could significantly reduce our regulatory capital ratios. Additionally, our deferred tax assets are subject to an evaluation of whether it is more likely than not that they will be realized for financial statement purposes. In making this determination, we consider all positive and negative evidence available including the impact of recent operating results as well as potential carryback of tax to prior years’ taxable income, reversals of existing taxable temporary differences, tax planning strategies and projected earnings within the statutory tax loss carryover period. We have determined that the deferred tax assets are more likely than not to be realized at December 31, 2011 (except for $32 million related to state deferred tax assets for which we have established a valuation allowance). If we were to conclude that a significant portion of our deferred tax assets were not more likely than not to be realized, the required valuation allowance could adversely affect our financial position and results of operations. 29 Changes in the soundness of other financial institutions could adversely affect us. Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Furthermore, although we do not hold any European sovereign debt, we may do business with and be exposed to financial institutions that have been affected by the recent European sovereign debt crisis. As a result, defaults by, or even mere speculation about, one or more financial services companies, or the financial services industry generally, may lead to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated if the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us. We are unable to make assurances that any such losses would not materially and adversely affect our business, financial condition or results of operations. Negative perceptions associated with our continued participation in the U.S. Treasury’s Capital Purchase Program (“CPP”) may adversely affect our ability to retain customers, attract investors and compete for new business opportunities. On November 14, 2008, Regions issued and sold 3,500,000 shares of Series A Preferred Stock and the Warrant to purchase up to 48,253,677 shares of our common stock to the U.S. Treasury as part of the CPP. In order to repurchase one or both securities, in whole or in part, we must establish that we have satisfied all of the conditions to repurchase and must obtain the approval of the Federal Reserve and the U.S. Treasury. The federal regulators have not provided any formal guidance on the conditions to exit the Troubled Asset Relief Program (“TARP”) and appear to address these questions on a case-by-case basis. Our expectation is that we would be required to generate or raise additional capital prior to exiting TARP. Our ability to raise additional capital will depend on market conditions at the time. There can be no assurance that we will be able to repurchase these securities from the U.S. Treasury. Our customers, employees and counterparties in our current and future business relationships may draw negative inferences regarding our strength as a financial institution based on our continued participation in the CPP. Any such negative perceptions and the limitations on incentive compensation contained in the American Recovery and Reinvestment Act (“ARRA”) may impair our ability to effectively compete with other financial institutions for business or to retain high performing employees. If this were to occur our business, financial condition, liquidity and results of operations may be adversely affected, perhaps materially. The limitations on incentive compensation contained in ARRA and its implementing regulations may adversely affect our ability to retain our highest performing employees. Because we have not yet repurchased the U.S. Treasury’s CPP investment, we remain subject to the restrictions on incentive compensation contained in the ARRA. On June 10, 2009, the U.S. Treasury released its interim final rule implementing the provisions of the ARRA and limiting the compensation practices at institutions in which the U.S. Treasury is invested. Financial institutions which have repurchased the U.S. Treasury’s CPP investment are relieved of the restrictions imposed by the ARRA and its implementing regulations. Because we remain subject to these restrictions, we may not be able to successfully compete with financial institutions that have exited the CPP to retain and attract high performing employees. If this were to occur, our business, financial condition and results of operations could be adversely affected, perhaps materially. 30 Maintaining or increasing market share may depend on market acceptance and regulatory approval of new products and services. Our success depends, in part, on the ability to adapt products and services to evolving industry standards. There is increasing pressure to provide products and services at lower prices. This can reduce net interest income and noninterest income from fee-based products and services. In addition, the widespread adoption of new technologies could require us to make substantial capital expenditures to modify or adapt existing products and services or develop new products and services. We may not be successful in introducing new products and services in response to industry trends or developments in technology, or those new products may not achieve market acceptance. As a result, we could lose business, be forced to price products and services on less advantageous terms to retain or attract clients, or be subject to cost increases. As a result, our business, financial condition or results of operations may be adversely affected. We need to stay current on technological changes in order to compete and meet customer demands. The financial services market, including banking services, is undergoing rapid changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and may enable us to reduce costs. Our future success may depend, in part, on our ability to use technology to provide products and services that provide convenience to customers and to create additional efficiencies in our operations. Some of our competitors have substantially greater resources to invest in technological improvements than we currently have. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. As a result, our ability to effectively compete to retain or acquire new business may be impaired, and our business, financial condition or results of operations, may be adversely affected. Our customers may pursue alternatives to bank deposits which could force us to rely on relatively more expensive sources of funding. We may experience an outflow of deposits because customers seek investments with higher yields or greater financial stability, prefer to do business with our competitors, or otherwise. This outflow of deposits could force us to rely more heavily on borrowings and other sources of funding to fund our business and meet withdrawal demands, thereby adversely affecting our net interest margin. We may also be forced, as a result of any outflow of deposits, to rely more heavily on equity to fund our business, resulting in greater dilution of our existing shareholders. As a result, our business, financial condition or results of operations may be adversely affected. We are subject to a variety of operational risks, environmental, legal and compliance risks, and the risk of fraud or theft by employees or outsiders, which may adversely affect our business and results of operations. We are exposed to many types of operational risks, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, and unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to attract and keep customers and can expose us to litigation and regulatory action. Actual or alleged conduct by Regions can also result in negative public opinion about our other businesses. Negative public opinion could also affect our credit ratings, which are important to our access to unsecured wholesale borrowings. If personal, non-public, confidential or proprietary information of customers in our possession were to be misappropriated, mishandled or misused, we could suffer significant regulatory consequences, reputational damage and financial loss. Such mishandling or misuse could include, for example, erroneously providing such information to parties who are not permitted to have the information, either by fault of our systems, employees, or counterparties, or the interception or inappropriate acquisition of such information by third parties. 31 Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. Our necessary dependence upon automated systems to record and process transactions and our large transaction volume may further increase the risk that technical flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. We also may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control (for example, computer viruses or electrical or telecommunications outages, or natural disasters, disease pandemics or other damage to property or physical assets) which may give rise to disruption of service to customers and to financial loss or liability. We are further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as we are) and to the risk that we (or our vendors’) business continuity and data security systems prove to be inadequate. The occurrence of any of these risks could result in our diminished ability to operate our business (for example, by requiring us to expend significant resources to correct the defect), as well as potential liability to clients, reputational damage and regulatory intervention, which could adversely affect our business, financial condition or results of operations, perhaps materially. Our information systems may experience an interruption or security breach. Failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors and other service providers, including as a result of cyber attacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses. As a large financial institution, we depend on our ability to process, record and monitor a large number of customer transactions on a continuous basis. As customer, public and regulatory expectations regarding operational and information security have increased, our operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions and breakdowns. Our business, financial, accounting, data processing systems or other operating systems and facilities may stop operating properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control. For example, there could be sudden increases in customer transaction volume; electrical or telecommunications outages; natural disasters such as earthquakes, tornadoes, and hurricanes; disease pandemics; events arising from local or larger scale political or social matters, including terrorist acts; and, as described below, cyber attacks. Although we have business continuity plans and other safeguards in place, our business operations may be adversely affected by significant and widespread disruption to our physical infrastructure or operating systems that support our businesses and customers. Information security risks for large financial institutions such as Regions have generally increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties. As noted above, our operations rely on the secure processing, transmission and storage of confidential information in our computer systems and networks. In addition, to access our products and services, our customers may use personal smartphones, tablet PC’s, and other mobile devices that are beyond our control systems. Although we believe we have robust information security procedures and controls, our technologies, systems, networks, and our customers’ devices may become the target of cyber attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of Regions’ or our customers’ confidential, proprietary and other information, or otherwise disrupt Regions’ or our customers’ or other third parties’ business operations. Third parties with which we do business or that facilitate our business activities, could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems or capacity constraints. Although to date we have not experienced any material losses relating to cyber attacks or other information security breaches, there can be no assurance that we will not suffer such losses in the future. Our risk and 32 exposure to these matters remains heightened because of, among other things, the evolving nature of these threats and the prevalence of Internet and mobile banking. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. Disruptions or failures in the physical infrastructure or operating systems that support our businesses and customers, or cyber attacks or security breaches of the networks, systems or devices that our customers use to access our products and services could result in customer attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect our business, results of operations or financial condition. We rely on other companies to provide key components of our business infrastructure. Third parties provide key components of our business operations such as data processing, recording and monitoring transactions, online banking interfaces and services, Internet connections and network access. While we have selected these third party vendors carefully, we do not control their actions. Any problems caused by these third parties, including those resulting from disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher volumes, or failure of a vendor to provide services for any reason or poor performance of services, could adversely affect our ability to deliver products and services to our customers and otherwise conduct our business. Financial or operational difficulties of a third party vendor could also hurt our operations if those difficulties interfere with the vendor’s ability to serve us. Replacing these third party vendors could also create significant delay and expense. Accordingly, use of such third parties creates an unavoidable inherent risk to our business operations. We depend on the accuracy and completeness of information about clients and counterparties. In deciding whether to extend credit or enter into other transactions with clients and counterparties, we may rely on information furnished by or on behalf of clients and counterparties, including financial statements and other financial information. We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors if made available. If this information is inaccurate, we may be subject to regulatory action, reputational harm or other adverse effects with respect to the operation of our business, our financial condition and our results of operations. We are exposed to risk of environmental liability when we take title to property. In the course of our business, we may foreclose on and take title to real estate. As a result, we could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination or may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we become subject to significant environmental liabilities, our business, financial condition or results of operations could be adversely affected. Our reported financial results depend on management’s selection of accounting methods and certain assumptions and estimates. Our accounting policies and assumptions are fundamental to our reported financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with generally accepted accounting principles and reflect management’s judgment of the most appropriate manner to report our financial condition and results. In some cases, management must 33 select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet may result in us reporting materially different results than would have been reported under a different alternative. Certain accounting policies are critical to presenting our reported financial condition and results. They require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. These critical accounting policies include: the allowance for credit losses; fair value measurements; intangible assets; mortgage servicing rights; and income taxes. Because of the uncertainty of estimates involved in these matters, we may be required to do one or more of the following: significantly increase the allowance for credit losses and/or sustain credit losses that are significantly higher than the reserve provided; recognize significant impairment on our goodwill, other intangible assets and deferred tax asset balances; or significantly increase our accrued income taxes. Changes in our accounting policies or in accounting standards could materially affect how we report our financial results and condition. From time to time, the Financial Accounting Standards Board and SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in us restating prior period financial statements. Risks Related to the Legal and Regulatory Framework in which Our Business Operates We have been the subject of increased litigation which could result in legal liability and damage to our reputation. We and certain of our subsidiaries have been named from time to time as defendants in various class actions and other litigation relating to their business and activities. Past, present and future litigation have included or could include claims for substantial compensatory or punitive damages or claims for indeterminate amounts of damages. We and certain of our subsidiaries are also involved from time to time in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding our and their business. These matters also could result in adverse judgments, settlements, fines, penalties, injunctions or other relief. In addition, in recent years, a number of judicial decisions have upheld the right of borrowers to sue lending institutions on the basis of various evolving legal theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has either violated a duty, whether implied or contractual, of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or shareholders. Substantial legal liability or significant regulatory action against us or our subsidiaries could materially adversely affect our business, financial condition or results of operations or cause significant harm to our reputation. Additional information relating to litigation affecting Regions and our subsidiaries is discussed in Note 23 “Commitments, Contingencies and Guarantees” to the consolidated financial statements of this Annual Report on Form 10-K. We are subject to extensive governmental regulation, which could have an adverse impact on our operations. The banking industry is extensively regulated and supervised under both federal and state law. Regions and Regions Bank are subject to the regulation and supervision of the Federal Reserve, the FDIC and the Superintendent of Banking of the State of Alabama. These regulations are intended primarily to protect 34 depositors, the public and the FDIC insurance fund, and not our shareholders. These regulations govern a variety of matters, including certain debt obligations, changes in control of bank holding companies and state-chartered banks, maintenance of adequate capital by bank holding companies and state-chartered banks, and general business operations and financial condition of Regions and Regions Bank (including permissible types, amounts and terms of loans and investments, the amount of reserves against deposits, restrictions on dividends, establishment of branch offices, and the maximum interest rate that may be charged by law). Additionally, all our non-bank subsidiaries are subject to oversight by the Federal Reserve, and certain of our other subsidiaries, such as Morgan Keegan, are subject to regulation, supervision and examination by other regulatory authorities, such as the SEC, FINRA and state securities and insurance regulators. As a result, we are subject to changes in federal and state law, as well as regulations and governmental policies, income tax laws and accounting principles. Regulations affecting banks and other financial institutions are undergoing continuous review and frequently change, and the ultimate effect of such changes cannot be predicted. Regulations and laws may be modified at any time, and new legislation may be enacted that will affect us, Regions Bank and our subsidiaries. Any changes in any federal and state law, as well as regulations and governmental policies, income tax laws and accounting principles, could affect us in substantial and unpredictable ways, including ways which may adversely affect our business, financial condition or results of operations. Failure to appropriately comply with any such laws, regulations or principles could result in sanctions by regulatory agencies, civil money penalties or damage to our reputation, all of which could adversely affect our business, financial condition or results of operations. Our regulatory position is discussed in greater detail under the “Bank Regulatory Capital Requirements” section and associated Capital Ratios table of Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operation” of this Annual Report on Form 10-K. Recent legislation regarding the financial services industry may have a significant adverse effect on our operations. The Dodd-Frank Act became law on July 21, 2010. Many of the provisions of the Dodd-Frank Act will directly affect our ability to conduct our business including: • • • • • • Imposition of higher prudential standards, including more stringent risk-based capital, leverage, liquidity and risk-management requirements, and numerous other requirements on “systemically significant institutions,” including all bank holding companies with assets of at least $50 billion (which would include Regions); Establishment of the Financial Stability Oversight Council to identify and impose additional regulatory oversight of large financial firms; Imposition of additional costs and fees, including fees to be set by the Federal Reserve and charged to “systemically significant institutions” to cover the cost of regulating such institutions and any FDIC assessment made to cover the costs of any regular or special examination of Regions or its affiliates; Establishment of the Consumer Financial Protection Bureau with broad authority to implement new consumer protection regulations and to examine and enforce compliance with federal consumer laws; Application to bank holding companies of regulatory capital requirements similar to those applied to banks, which requirements exclude, on a phase-out basis, all trust preferred securities and cumulative preferred stock from Tier 1 capital (except for preferred stock issued under TARP, such as the Series A Preferred Stock, which will continue to qualify as Tier 1 capital as long as it remains outstanding); and Establishment of new rules and restrictions regarding the origination of mortgages. Many of the provisions of the Dodd-Frank Act became effective on July 21, 2011, the one-year anniversary of its enactment. However, a number of these other provisions still require extensive rulemaking, guidance and interpretation by regulatory authorities and have extended implementation periods and delayed effective dates. Accordingly, in some respects, the ultimate impact of the Dodd-Frank Act and its effect on Regions and the U.S. financial system generally may not be known for some time. 35 The provisions of the Dodd-Frank Act and any future rules adopted to implement those provisions as well as any additional legislative or regulatory changes may impact the profitability of our business activities and costs of operations, require that we change certain of our business practices, materially affect our business model or affect retention of key personnel, require us to raise additional regulatory capital, including additional Tier 1 capital, and could expose us to additional costs (including increased compliance costs). These and other changes may also require us to invest significant management attention and resources to make any necessary changes and may adversely affect our ability to conduct our business as previously conducted or our results of operations or financial condition. Increases in FDIC insurance premiums may adversely affect our earnings. Our deposits are insured by the FDIC up to legal limits and, accordingly, we are subject to FDIC deposit insurance assessments. We generally cannot control the amount of premiums we will be required to pay for FDIC insurance. High levels of bank failures over the past four years and increases in the statutory deposit insurance limits have increased resolution costs to the FDIC and put pressure on the Deposit Insurance Fund (“DIF”). In order to maintain a strong funding position and restore the reserve ratios of the DIF, the FDIC increased assessment rates on insured institutions, charged a special assessment to all insured institutions as of June 30, 2009, and required banks to prepay three years’ worth of premiums on December 30, 2009. If there are additional financial institution failures, we may be required to pay even higher FDIC premiums than the recently increased levels, or the FDIC may charge additional special assessments. Further, the FDIC increased the DIF’s target reserve ratio to 2.0 percent of insured deposits following the Dodd-Frank Act’s elimination of the 1.5 percent cap on the DIF’s reserve ratio. Additional increases in our assessment rate may be required in the future to achieve this targeted reserve ratio. These recent increases in deposit assessments and any future increases, required prepayments or special assessments of FDIC insurance premiums may adversely affect our business, financial condition or results of operations. Additionally, in February 2011, pursuant to the Dodd-Frank Act, the FDIC amended its regulations regarding assessment for federal deposit insurance to base such assessments on the average total consolidated assets of the insured institution during the assessment period, less the average tangible equity of the institution during the assessment period. The FDIC also adopted a revised risk-based assessment calculation in February 2011. In January 2010, the FDIC proposed a rule tying assessment rates of FDIC insured institutions to the institution’s employee compensation programs. Comments were due on February 18, 2010, but as of February 2012, no final rule has been adopted. The exact nature and cumulative effect of these recent changes are not yet known, but they are expected to increase the amount of premiums we must pay for FDIC insurance. Any such increases may adversely affect our business, financial condition or results of operations. The recent repeal of federal prohibitions on payment of interest on demand deposits could increase our interest expense. On July 21, 2011, all federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-Frank Act. As a result, financial institutions could commence offering interest on demand deposits to compete for clients. We do not yet know what interest rates or products our peer institutions may offer in response to this repeal. We anticipate that our interest expense will increase and our net interest margin will decrease if we begin offering interest on demand deposits to attract new clients or maintain current customers. Consequently, our business, financial condition or results of operations may be adversely affected, perhaps materially. We may be subject to more stringent capital requirements. Regions and Regions Bank are each subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital that must be maintained. From time to time, the regulators implement changes to these regulatory capital adequacy guidelines. If we fail to meet these minimum 36 capital guidelines and other regulatory requirements, our financial condition would be materially and adversely affected. In light of proposed changes to regulatory capital requirements contained in the Dodd-Frank Act and the regulatory accords on international banking institutions formulated as part of the Basel Committee III process and implemented by the Federal Reserve, we may be required to satisfy additional, more stringent, capital adequacy standards. The ultimate impact of the new capital and liquidity standards on us cannot be determined at this time and will depend on a number of factors, including the treatment and implementation by the U.S. banking regulators. These requirements, however, and any other new regulations, could adversely affect our ability to pay dividends, or could require us to reduce business levels or to raise capital, including in ways that may adversely affect our financial condition or results of operations. For more information concerning our compliance with capital requirements, see the “Bank Regulatory Capital Requirements” section of Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operation” of this Annual Report on Form 10-K. Unfavorable results from ongoing stress analyses conducted on Regions may adversely affect our ability to retain customers or compete for new business opportunities. As part of the Comprehensive Capital Analysis and Review implemented pursuant to the Dodd-Frank Act, the Federal Reserve and Regions will conduct ongoing stress analyses of Regions in connection with evaluating Regions’ capital plan. The Federal Reserve has indicated that it will release publicly a summary containing bank holding company specific information and results of the 2012 stress analyses it conducts in connection with the CCAR. Under the Proposed SIFI Rules discussed under “Regulatory Reforms” in the “Supervision and Regulation” section of Item 1. of this Annual Report on Form 10-K, the Federal Reserve will also conduct an annual stress analysis of Regions to evaluate our ability to absorb losses in adverse economic and financial conditions. This stress analysis will use three economic and financial scenarios generated by the Federal Reserve, including adverse and severely adverse scenarios. The Proposed SIFI Rules would also require us to conduct our own semi- annual stress analysis to assess the potential impact on Regions, including our consolidated earnings, losses and capital, under each of the economic and financial conditions used as part of the Federal Reserve’s annual stress analysis. A summary of the results of certain aspects of the Federal Reserve’s annual stress analysis would be released publicly and contain bank holding company specific information and results. The Proposed SIFI Rules would also require us to disclose publicly the results of our semi-annual stress analyses. Although the stress tests are not meant to assess our current condition, and even if we remain strong, stable and well capitalized, we cannot predict our customers’ potential misinterpretation of, and adverse reaction to, the results of these stress tests. Any potential misinterpretations and adverse reactions could limit our ability to attract and retain customers or to effectively compete for new business opportunities. The inability to attract and retain customers or effectively compete for new business may have a material and adverse effect on our business, financial condition or results of operations. Additionally, our regulators may require us to raise additional capital or take other actions, or may impose restrictions on our business, based on the results of the stress tests, including rejecting or requiring revisions to our annual capital plan submitted in connection with the Comprehensive Capital Analysis and Review. We may not be able to raise additional capital if required to do so, or may not be able to do so on terms which are advantageous to Regions or its current shareholders. Any such capital raises, if required, may also be dilutive to our existing shareholders. If an orderly liquidation of a systemically important non-bank financial company were triggered, we could face assessments for the Orderly Liquidation Fund. The Dodd-Frank Act creates a new mechanism, the OLA, for liquidation of systemically important nonbank financial companies, including bank holding companies. The OLA is administered by the FDIC and is based on 37 the FDIC’s bank resolution model. The Secretary of the U.S. Treasury may trigger a liquidation under this authority only after consultation with the President of the United States and after receiving a recommendation from the boards of the FDIC and the Federal Reserve upon a two-thirds vote. Liquidation proceedings will be funded by the Orderly Liquidation Fund, which will borrow from the U.S. Treasury and impose risk-based assessments on covered financial companies. Risk-based assessments would be made, first, on entities that received more in the resolution than they would have received in the liquidation to the extent of such excess, and second, if necessary, on, among others, bank holding companies with total consolidated assets of $50 billion or more, such as Regions. Any such assessments may adversely affect our business, financial condition or results of operations. Rules regulating the imposition of debit card income may adversely affect our operations. The Dodd-Frank Act gave the Federal Reserve the authority to establish rules regarding interchange fees charged by payment card issuers for transactions in which a person uses certain types of debit cards, requiring that such fees be reasonable and proportional to the cost incurred by the issuer with respect to such transaction, subject to a possible adjustment to account for costs incurred in connection with the issuer’s fraud prevention policies. On June 29, 2011, the Federal Reserve approved its final rule on debit interchange fees. The final rule caps the maximum debit interchange fee at 21 cents, plus 5 basis points (multiplied by the amount of the transaction) to reflect a portion of fraud losses. The restrictions on interchange fees contained in the final rule are applicable to all debit card issuers who, together with their affiliates, possess more than $10 billion in assets, such as Regions Bank. The debit interchange fee provision took effect on October 1, 2011. The Federal Reserve estimates that covered issuers, such as Regions Bank, may experience a decline in debit interchange fee revenue by more than 40 percent under the final rule. In 2011, Regions Bank collected $335 million in debit card income. We estimate that our debit card income will likely be reduced by approximately $180 million annually under the final rule before mitigation efforts. In addition to the final rule on debit interchange fees, the Federal Reserve issued an interim final rule that provides an upward adjustment of a maximum of 1 cent to an issuer’s debit card interchange fee if the issuer establishes and implements procedures that meet specified fraud-prevention standards set forth under the interim final rule. In order to receive the adjustment, qualifying issuers must certify their eligibility to the payment card networks in which they participate. The fraud-prevention adjustment provision took effect on October 1, 2011, but may be revised by the Federal Reserve at a later date based on comments received through September 30, 2011. Regions is currently eligible for this adjustment. Since this rule is not yet final, the effects of this provision in its final form on our business, financial condition or results of operation are not yet known at this time. The final rule also prohibits issuers and payment card networks from restricting the number of payment card networks on which an electronic debit transaction may be processed to fewer than two unaffiliated networks, regardless of the means by which a transaction may be authorized. This network exclusivity provision is applicable to all issuers, even those exempt from the debit interchange fees. Issuers will be subject to the network exclusivity rule beginning on April 1, 2012. The Federal Reserve predicts that this network exclusivity provision may result in higher costs for some issuers and may place downward pressure on interchange fees because merchants may opt to route transactions over less expensive networks. The effects of this rule on our business, financial condition or results of operation are not yet known at this time. Risks Related to the Sale of Morgan Keegan The sale of Morgan Keegan may have an adverse impact on our business. Pursuant to a stock purchase agreement entered into on January 11, 2012 (the “Stock Purchase Agreement”), Regions agreed to sell Morgan Keegan and certain related companies to Raymond James Financial, Inc. for 38 approximately $930 million. The transaction is expected to close around the end of the first quarter of 2012, subject to customary conditions including the receipt of required regulatory approvals and customary closing conditions. We expect to receive a pre-closing dividend of $250 million from Morgan Keegan, bringing our total proceeds from the sale to approximately $1.18 billion, subject to adjustment. The cash purchase price calculated under the Stock Purchase Agreement is subject to adjustment based on (1) the tangible book value of Morgan Keegan as of the closing of the transaction and (2) retention of Morgan Keegan employees through the date 90 days after closing of the transaction (the “Measurement Date”). If a significant number of Morgan Keegan employees leave prior to the Measurement Date or if the tangible book value of Morgan Keegan declines, the purchase price for Morgan Keegan that we receive under the Stock Purchase Agreement may be decreased. Risks Related to Our Common Stock The market price of shares of our common stock will fluctuate. The market price of our common stock could be subject to significant fluctuations due to a change in sentiment in the market regarding our operations or business prospects. Such risks may be affected by: • • • • • • • • Operating results that vary from the expectations of management, securities analysts and investors; Developments in our business or in the financial sector generally; Regulatory changes affecting our industry generally or our business and operations; The operating and securities price performance of companies that investors consider to be comparable to us; Announcements of strategic developments, acquisitions and other material events by us or our competitors; Expectations of or actual equity dilution; Changes in the credit, mortgage and real estate markets, including the markets for mortgage-related securities; and Changes in global financial markets, global economies and general market conditions, such as interest or foreign exchange rates, stock, commodity, credit or asset valuations or volatility. Stock markets in general and our common stock in particular have shown considerable volatility in the recent past. The market price of our common stock may continue to be subject to similar fluctuations unrelated to our operating performance or prospects. Increased volatility could result in a decline in the market price of our common stock. We are a holding company and depend on our subsidiaries for dividends, distributions and other payments. We are a legal entity separate and distinct from our banking and other subsidiaries. Our principal source of cash flow, including cash flow to pay dividends to our stockholders and principal and interest on our outstanding debt, is dividends from Regions Bank. There are statutory and regulatory limitations on the payment of dividends by Regions Bank to us, as well as by us to our stockholders. Regulations of both the Federal Reserve and the State of Alabama affect the ability of Regions Bank to pay dividends and other distributions to us and to make loans to us. If Regions Bank is unable to make dividend payments to us and sufficient cash or liquidity is not otherwise available, we may not be able to make dividend payments to our common and preferred stockholders or principal and interest payments on our outstanding debt. See the “Stockholders’ Equity” section of Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operation” of this Annual Report on Form 10-K. In addition, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. 39 We may not pay dividends on your common stock. Holders of shares of our common stock are only entitled to receive such dividends as our board of directors may declare out of funds legally available for such payments. Although we have historically declared cash dividends on our common stock, we are not required to do so and may reduce or eliminate our common stock dividend in the future. This could adversely affect the market price of our common stock. Regions has reduced its quarterly dividend to $0.01 per share and does not expect to increase its quarterly dividend above such level for the foreseeable future. Regions is also subject to statutory and regulatory limitations on our ability to pay dividends on our common stock. For example, it is the policy of the Federal Reserve that bank holding companies should generally pay dividends on common stock only out of earnings, and only if prospective earnings retention is consistent with the organization’s expected future needs, asset quality, and financial condition. Recently issued temporary guidance from the Federal Reserve states that our dividend policies will be assessed, among other things, against our ability to achieve Basel III capital ratio requirements. Moreover, the Federal Reserve will closely scrutinize any dividend payout ratios exceeding 30 percent of after-tax net income. Additionally, as of December 30, 2011, the Federal Reserve will require bank holding companies with $50 billion or more of total consolidated assets, such as Regions, to submit annual capital plans to the applicable Federal Reserve Bank for review before they can make capital distributions such as dividends. If the Federal Reserve does not approve Regions’ capital plan, Regions may not be able to declare dividends. Anti-takeover laws and certain agreements and charter provisions may adversely affect share value. Certain provisions of state and federal law and our certificate of incorporation may make it more difficult for someone to acquire control of us without our Board of Directors’ approval. Under federal law, subject to certain exemptions, a person, entity or group must notify the federal banking agencies before acquiring control of a bank holding company. Acquisition of 10 percent or more of any class of voting stock of a bank holding company or state member bank, including shares of our common stock, creates a rebuttable presumption that the acquirer “controls” the bank holding company or state member bank. Also, as noted under the “Supervision and Regulation” section of Item 1. of this Annual Report on Form 10-K, a bank holding company must obtain the prior approval of the Federal Reserve before, among other things, acquiring direct or indirect ownership or control of more than 5 percent of the voting shares of any bank, including Regions Bank. There also are provisions in our certificate of incorporation that may be used to delay or block a takeover attempt. As a result, these statutory provisions and provisions in our certificate of incorporation could result in Regions being less attractive to a potential acquirer. We may need to raise additional debt or equity capital in the future; such capital may be dilutive to our existing shareholders or may not be available when needed or at all. We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial performance. The recent economic slowdown and loss of confidence in financial institutions may increase our cost of funding and limit our access to some of our customary sources of capital, including inter-bank borrowings, repurchase agreements and borrowings from the discount window of the Federal Reserve. Additionally, our long-term debt securities are currently rated below investment grade by certain of the credit ratings agencies. As a non-investment grade issuer, our cost of funding and access to the capital markets may be further limited. We cannot assure you that capital will be available to us on acceptable terms or at all. Any occurrence that may limit our access to the capital markets, such as a decline in the confidence of debt purchasers, depositors of Regions Bank or counterparties participating in the capital markets, our status as a non-investment grade issuer, 40 or a further downgrade of our debt rating, may adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity. An inability to raise additional capital on acceptable terms when needed could have a materially adverse effect on our business, financial condition or results of operations. Future issuances of additional equity securities could result in dilution of existing stockholders’ equity ownership. We may determine from time to time to issue additional equity securities to raise additional capital, support growth, or to make acquisitions. Further, we may issue stock options or other stock grants to retain and motivate our employees. These issuances of our securities could dilute the voting and economic interests of our existing shareholders. Future equity offerings could impair the value of our deferred tax assets and adversely affect our capital ratios. Our ability to utilize our deferred tax assets to offset future taxable income may be significantly limited if we experience an “ownership change” as defined in section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). In general, an ownership change will occur if there is a cumulative change in our ownership by “5 percent shareholders” (as defined in the Code) that exceeds 50 percent (as defined in the Code) over a rolling three-year period. Any corporation experiencing an ownership change will generally be subject to an annual limitation on its deferred tax assets prior to the ownership change equal to the value of such corporation immediately before the ownership change, multiplied by the long-term tax-exempt rate (subject to certain adjustments). The annual limitation would be increased each year to the extent that there is an unused limitation in a prior year. The limitation arising from an ownership change under section 382 of the Code on our ability to utilize our deferred tax assets would depend on the value of Regions’ stock at the time of the ownership change. As a result, future investments by new or existing “5 percent shareholders” or issuances of common equity could materially increase the risk that we could experience an ownership change in the future. If we were to experience an ownership change under section 382 of the Code for any reason, the value of our deferred tax assets may be impaired and may cause a decrease in our financial position, results of operations and regulatory capital ratios. Item 1B. Unresolved Staff Comments None. Item 2. Properties Regions’ corporate headquarters occupy the main banking facility of Regions Bank, located at 1900 Fifth Avenue North, Birmingham, Alabama 35203. At December 31, 2011, Regions Bank, Regions’ banking subsidiary, operated 1,726 banking offices. Regions provides investment banking and brokerage services from 90 full-service offices of Morgan Keegan. At December 31, 2011, there were no significant encumbrances on the offices, equipment and other operational facilities owned by Regions and its subsidiaries. See Item 1. “Business” of this Annual Report on Form 10-K for a list of the states in which Regions Bank’s branches and Morgan Keegan’s offices are located. Item 3. Legal Proceedings Information required by this item is set forth in Note 23 “Commitments, Contingencies and Guarantees” in the Notes to the Consolidated Financial Statements which are included in Item 8. of this Annual Report on Form 10-K. 41 Item 4. Mine Safety Disclosures. Not applicable. Executive Officers of the Registrant Information concerning the Executive Officers of Regions is set forth under Item 10. “Directors, Executive Officers and Corporate Governance” of this Annual Report on Form 10-K. 42 PART II Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Regions’ common stock, par value $.01 per share, is listed for trading on the New York Stock Exchange under the symbol RF. Quarterly high and low sales prices of and cash dividends declared on Regions’ common stock are set forth in Table 30 “Quarterly Results of Operations” of “Management’s Discussion and Analysis”, which is included in Item 7. of this Annual Report on Form 10-K. As of February 15, 2012, there were 73,015 holders of record of Regions’ common stock (including participants in the Computershare Investment Plan for Regions Financial Corporation). Restrictions on the ability of Regions Bank to transfer funds to Regions at December 31, 2011, are set forth in Note 13 “Regulatory Capital Requirements and Restrictions” to the consolidated financial statements, which are included in Item 8. of this Annual Report on Form 10-K. A discussion of certain limitations on the ability of Regions Bank to pay dividends to Regions and the ability of Regions to pay dividends on its common stock is set forth in Item 1. “Business” under the heading “Supervision and Regulation—Payment of Dividends” of this Annual Report on Form 10-K. The following table presents information regarding issuer purchases of equity securities during the fourth quarter of 2011. Issuer Purchases of Equity Securities Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs Period October 1—31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . November 1—30, 2011 . . . . . . . . . . . . . . . . . . . . . . December 1—31, 2011 . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — — — — — — — — 23,072,300 23,072,300 23,072,300 23,072,300 On January 18, 2007, Regions’ Board of Directors authorized the repurchase of 50 million shares of Regions’ common stock through open market or privately negotiated transactions and announced the authorization of this repurchase. As indicated in the table above, approximately 23.1 million shares remain available for repurchase under the existing plan. Restrictions on Dividends and Repurchase of Stock Holders of Regions common stock are only entitled to receive such dividends as Regions’ board of directors may declare out of funds legally available for such payments. Furthermore, holders of Regions common stock are subject to the prior dividend rights of any holders of Regions preferred stock then outstanding. As of December 31, 2011, there were 3,500,000 shares of Regions’ Fixed Rate Cumulative Perpetual Preferred Stock Series A (the “Series A Preferred Stock”) with liquidation amount of $1,000 per share, issued and outstanding. Under the terms of the Series A Preferred Stock, as long as the Series A Preferred Stock is outstanding, Regions’ ability to declare and pay dividends on or redeem or repurchase certain equity securities, including Regions common stock, will be subject to restrictions in the event Regions fails to declare and pay (or set aside for payment) full dividends on the Series A Preferred Stock. 43 Regions has reduced its quarterly dividend to $0.01 per share and does not expect to increase its quarterly dividend above such level for the foreseeable future. Also, Regions is a bank holding company, and its ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends. In addition, the terms of Regions’ outstanding junior subordinated debt securities prohibit it from declaring or paying any dividends or distributions on Regions’ capital stock, including its common stock, or purchasing, acquiring, or making a liquidation payment on such stock, if Regions has given notice of its election to defer interest payments but the related deferral period has not yet commenced or a deferral period is continuing. 44 PERFORMANCE GRAPH Set forth below is a graph comparing the yearly percentage change in the cumulative total return of Regions’ common stock against the cumulative total return of the S&P 500 Index and the S&P Banks Index for the past five years. This presentation assumes that the value of the investment in Regions’ common stock and in each index was $100 and that all dividends were reinvested. $120 $100 $80 $60 $40 $20 $0 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Regions S&P 500 Index S&P Banks Index 12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010 12/31/2011 Cumulative Total Return Regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . S&P 500 Index . . . . . . . . . . . . . . . . . . . . . . . S&P Banks Index . . . . . . . . . . . . . . . . . . . . . $100.00 100.00 100.00 $ 66.36 105.49 77.32 $23.90 66.46 48.97 $16.39 84.05 45.67 $21.81 96.71 55.31 $13.51 98.76 49.79 Item 6. Selected Financial Data The information required by Item 6. is set forth in Table 1 “Financial Highlights” of “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, which is included in Item 7. of this Annual Report on Form 10-K. 45 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures about Market Risk INTRODUCTION EXECUTIVE SUMMARY Management believes the following points summarize several of the most relevant items necessary for an understanding of the financial aspects of Regions Financial Corporation’s (“Regions” or “the Company”) business, particularly regarding its 2011 results. Cross references to more detailed information regarding each topic within Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and the consolidated financial statements are included. This summary is intended to assist in understanding the information provided, but should be read in conjunction with the entire MD&A and consolidated financial statements, as well as the other sections of this Annual Report on Form 10-K. • Morgan Keegan— On January 11, 2012, Regions entered into a stock purchase agreement to sell Morgan Keegan & Company, Inc. and related affiliates (“Morgan Keegan”) to Raymond James Financial, Inc. (“Raymond James”) for approximately $930 million in cash. As part of the transaction, Morgan Keegan will also pay Regions a dividend of $250 million before closing, pending regulatory approval, resulting in total proceeds of approximately $1.18 billion to Regions, subject to adjustment. The transaction is anticipated to close around the end of the first quarter of 2012, subject to regulatory approvals and customary closing conditions. Morgan Asset Management and Regions Morgan Keegan Trust are not included in the sale. The transaction purchase price is subject to adjustment based on the closing tangible equity of the entities being sold and retention of Morgan Keegan associates in the period 90 days after closing. Regions believes any adjustments to the sales price will not have a material impact to the consolidated financial statements. Additionally, Regions will indemnify Raymond James for all litigation matters related to pre-closing activities. At closing, Regions will recognize the fair values of the indemnification, which will require an estimate of approximately $210 million of additional liabilities, and will be included in the gain / (loss) on disposition. The transaction reduces the Company’s overall risk profile, provides substantial liquidity at the holding company level, and improves key capital ratios. It also establishes a business relationship with Raymond James, which is expected to provide incremental revenue opportunities and a source of low-cost deposits. As a result of the process of selling Morgan Keegan, Regions recorded in the fourth quarter of 2011 a non-cash goodwill impairment charge of $731 million (net of $14 million income tax impact) within the Investment Banking/Brokerage/Trust segment. Based on a relative fair value allocation, $478 million of the impairment charge was recorded within discontinued operations and $253 million within continuing operations. The goodwill impairment charge does not have an adverse impact on regulatory capital. For more information, refer to the following additional sections within this Form 10-K: • Discussion of Intangible Assets within the Critical Accounting Policies and Estimates section of MD&A Note 3 “Discontinued Operations” to the consolidated financial statements Note 9 “Intangible Assets” to the consolidated financial statements Note 23 “Commitments, Contingencies and Guarantees” to the consolidated financial statements Note 25 “Subsequent Events” to the consolidated financial statements • • • • Credit—The economy has been and will be the primary factor which influences Regions’ loan portfolio. Although the economy is recovering at a slow pace, unemployment remains high and the housing sector continues to be weak. However, even with this backdrop, Regions did experience credit quality improvement in 2011. Regions’ investor real estate loan portfolio, which includes credit to real estate developers and investors for the financing of land or buildings, declined 33 percent in 2011 and totaled $10.7 billion as of December 31, 2011. In addition, the land, single-family and condominium components of the investor real estate portfolio, which have been the Company’s most distressed loans, declined 43 percent and ended the year at $1.8 billion. The reduction in investor real estate over the past few years has aided in a 40 percent decline in total gross inflows of non-performing loans in 2011. In addition, commercial and investor real estate criticized loans, which are the Company’s earliest • 46 indicator of problem loans, declined 35 percent, and non-performing assets decreased 24 percent during 2011. These favorable trends contributed to a 29 percent decline in net charge-offs and a 47 percent decrease in the 2011 loan loss provision. Although the loan loss provision declined, the coverage ratio of allowance for loan losses to non-performing loans was 1.16x as of December 31, 2011, up from 1.01x as of December 31, 2010. Management is encouraged by these trends and is cautiously optimistic that credit metrics will continue to trend favorably. However, unemployment remains high throughout Regions’ footprint, property valuations continue to be pressured, and credit costs are expected to remain elevated, as compared to historical levels. New accounting guidance led to a higher level of troubled debt restructurings during 2011. The change had no material impact on the Company’s overall allowance for loan losses. For more information, refer to the following additional sections within this Form 10-K: • • • • • • 2011 Overview discussion in MD&A Discussion of Allowance for Credit Losses within the Critical Accounting Policies and Estimates section of MD&A Other Real Estate Owned discussion within the Non-Interest Expense section of MD&A Loans and Allowance for Credit Losses discussion within the Balance Sheet Analysis section of MD&A Credit Risk section of MD&A Note 6 “Allowance for Credit Losses” to the consolidated financial statements • Liquidity—At the end of 2011, Regions Bank had over $4.9 billion in cash on deposit with the Federal Reserve, the loan-to-deposit ratio was 81 percent and cash at the parent company totaled $2.5 billion. Furthermore, as noted in the Morgan Keegan section above, the parent company cash level is expected to increase from the proceeds of the sale of Morgan Keegan. Regions’ policy is to maintain a sufficient level of cash to meet projected cash needs, including all debt service, dividends, and maturities, for the subsequent two years at the parent company and for acceptable periods at the bank and other affiliates. The Company’s liquidity contingency planning does not rely on unsecured sources, although these markets are periodically tested to ensure they are available. Maturities of loans and securities provide a constant flow of funds available for cash needs. At December 31, 2011, the Company’s borrowing capacity with the Federal Reserve Discount Window was $19.4 billion based on available collateral. Borrowing capacity with the FHLB was $5.4 billion based on available collateral at the same date. Additionally, the Company has $9.9 billion of unencumbered liquid securities available for pledging or repurchase agreements. The Company also has a bank note program and has issued senior and subordinated notes at the parent company level. In 2011, Regions’ long-term outlook was raised to stable from negative from both Standard & Poors (“S&P”) and Fitch Ratings. In February 2012, Moody’s Investors Service (“Moody’s”) revised Regions’ outlook to stable from negative. As of December 31, 2011, S&P and Moody’s credit ratings for Regions Financial Corporation were below investment grade. For Regions Bank, Moody’s credit ratings were below investment grade. For more information, refer to the following additional sections within this Form 10-K: • • • • • • • Discussion of Short-Term Borrowings within the Balance Sheet Analysis section of MD&A Discussion of Long-Term Borrowings within the Balance Sheet Analysis section of MD&A Ratings section of MD&A Liquidity Risk section of MD&A Note 11 “Short-Term Borrowings” to the consolidated financial statements Note 12 “Long-Term Borrowings” to the consolidated financial statements Note 23 “Commitments, Contingencies and Guarantees” to the consolidated financial statements 47 • • Interest Rate Risk—In 2011, the net interest margin from continuing operations expanded to 3.07 percent from 2.91 percent in 2010, largely due to a mix shift from time deposits to lower cost deposit products, resulting in deposit costs decreasing to 0.49 percent in 2011 from 0.78 percent in 2010. However, the margin continues to be negatively affected by a persistently low interest rate environment, elevated non-performing asset levels, and elevated cash levels. Loan yields remained stable at 4.31 percent as the Company began to see the benefits from migrating toward more consumer products, such as re-entering credit cards and indirect auto lending. However, the Company’s securities yield declined 58 basis points driven by higher prepayments in its agency guaranteed residential mortgage-backed securities portfolio and reinvesting proceeds into lower yielding securities. The Company decreased the duration of the securities portfolio to 2.1 years as of December 31, 2011 from 3.4 years as of December 31, 2010. Management expects to see incremental improvement in net interest income and the resulting net interest margin in 2012 as the amount of cash at the Federal Reserve and non-performing assets continue to decline. Furthermore, Regions’ balance sheet is in an asset sensitive position such that if economic conditions were to improve more rapidly, thereby resulting in a rise in interest rates, the net interest margin would likely respond favorably. For more information, refer to the following additional sections within this Form 10-K: • • • 2011 Overview discussion in MD&A Net Interest Income and Margin section of MD&A Interest Rate Risk section of MD&A Regulatory Capital—Regions’ ability to maintain appropriate levels of capital is critical to its safety and soundness. At December 31, 2011, Regions’ Tier 1 capital and Tier 1 common (non-GAAP) ratios were 13.28 percent and 8.51 percent, respectively. The corresponding Basel III ratios (non-GAAP) based on Regions’ current understanding of the guidelines are 11.39 percent and 7.70 percent, respectively. These ratios are above the respective Basel III minimums of 8.5 percent and 7 percent. Regions’ capital planning process is executed by management, overseen by the Board of Directors, and supervised by banking regulators. The process utilizes a base case, multiple adverse cases and a growth forecast. In early 2012, as part of the required Comprehensive Capital Analysis and Review (“CCAR”), Regions submitted four scenarios including the company’s baseline forecast, the Federal Reserve’s baseline outlook, the company’s stress case and the Federal Reserve’s stress case. Regions expects to receive its results from the Federal Reserve by the middle of March 2012. The Federal Reserve intends to publish the results of the supervisory stress test component of the CCAR for Regions and all companies that participated. For more information, refer to the following additional sections within this Form 10-K: 2011 Overview discussion in MD&A Table 2 – “GAAP to Non-GAAP reconciliation” Bank Regulatory Capital Requirements section of MD&A Note 13 “Regulatory Capital Requirements and Restrictions” to the consolidated financial statements • • • • GENERAL The following discussion and financial information is presented to aid in understanding Regions’ financial position and results of operations. The emphasis of this discussion will be on continuing operations for the years 2011, 2010 and 2009; in addition, financial information for prior years will also be presented when appropriate. Certain amounts in prior year presentations have been reclassified to conform to the current year presentation, except as otherwise noted. Regions’ profitability, like that of many other financial institutions, is dependent on its ability to generate revenue from net interest income and non-interest income sources. Net interest income is the difference between 48 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, mortgage servicing and secondary marketing, trust and asset management activities, insurance activities, capital markets and other customer services, which Regions provides. Results of operations are also affected by the provision for loan losses and non-interest expenses such as salaries and employee benefits, occupancy, professional fees, FDIC insurance, other real estate owned and other operating expenses, as well as income taxes. In 2011, Regions’ non-interest expense from continuing operations included a $253 million goodwill impairment charge related to the investment banking/brokerage/trust reporting unit. In 2010, Regions’ non-interest expense from continuing operations included a $75 million regulatory charge. 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 financial institutions, including Regions. Lending and deposit activities and fee income generation are influenced by levels of business spending and investment, consumer income, consumer spending and savings, capital market activities, and competition among financial institutions, as well as customer preferences, interest rate conditions and prevailing market rates on competing products in Regions’ market areas. Regions’ business strategy has been and continues to be focused on providing a competitive mix of products and services, delivering quality customer service and maintaining a branch distribution network with offices in convenient locations. Dispositions On January 11, 2012, Regions announced that it had entered into a stock purchase agreement to sell Morgan Keegan to Raymond James Financial, Inc., for approximately $930 million in cash. As part of the transaction, Morgan Keegan will also pay Regions a dividend of $250 million before closing, pending regulatory approvals, resulting in total proceeds of approximately $1.18 billion to Regions subject to adjustment. The transaction is anticipated to close around the end of the first quarter of 2012, subject to regulatory approvals and customary closing conditions. Morgan Asset Management and Regions Morgan Keegan Trust are not included in the sale. Results of operations for the entities being sold are presented separately as discontinued operations for all periods presented on the consolidated statements of operations because the pending sale met all of the criteria for reporting as discontinued operations at the December 31, 2011 balance sheet date. Refer to Note 3 “Discontinued Operations” and Note 25 “Subsequent Event” for further details. Business Segments Regions provides traditional commercial, retail and mortgage banking services, as well as other financial services in the fields of investment banking, asset management, trust, mutual funds, securities brokerage, insurance and other specialty financing. Regions carries out its strategies and derives its profitability from the following business segments: Banking/Treasury Regions’ primary business is providing traditional commercial, retail and mortgage banking services to its customers. Regions’ banking subsidiary, Regions Bank, operates as an Alabama state-chartered bank with branch offices in Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Mississippi, Missouri, North Carolina, South Carolina, Tennessee, Texas and Virginia. The Treasury function includes the Company’s securities portfolio and other wholesale funding activities. In 2011, Regions’ banking and treasury operations contributed $355 million of net income. 49 Investment Banking/Brokerage/Trust Regions has provided investment banking, brokerage and trust services through Morgan Keegan, a subsidiary of Regions and one of the largest investment firms based in the South. Due to the pending sale of Morgan Keegan, Regions has separated these categories into continuing operations, which includes trust and asset management services to be retained by Regions, and discontinued operations, which includes Morgan Keegan’s private client, retail brokerage services, fixed-income capital markets and equity capital markets line of businesses. Prior year disclosures have been adjusted to conform to the 2011 presentation. In 2011, Regions’ Investment Banking/Brokerage/Trust operations reported a loss of $595 million, primarily as the result of a $731 million (net of $14 million income tax impact) non-cash goodwill impairment charge. Insurance Regions provides insurance-related services through Regions Insurance Group, Inc., a subsidiary of Regions. Regions Insurance Group is one of the 20 largest insurance brokers in the country. The insurance segment includes all business associated with insurance coverage for various lines of personal and commercial insurance, such as property, casualty, life, health and accident insurance. The Insurance segment also offers credit-related insurance products, such as term life, credit life, environmental, crop and mortgage insurance, as well as debt cancellation products to customers of Regions. Insurance activities contributed $25 million of net income in 2011. During 2011, minor reclassifications were made from the Banking/Treasury segment to the Insurance segment to more appropriately present management’s current view of the segments. See Note 22 “Business Segment Information” to the consolidated financial statements for further information on Regions’ business segments. 50 Table 1—Financial Highlights EARNINGS SUMMARY Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income (loss) after provision for loan losses . . . . . . . . . . . . . . . . . . . . . Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) from continuing operations before income taxes . . . . . . . . . . . . . . . . Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) from discontinued operations before income taxes . . . . . . . . . . . . . . . Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) from discontinued operations, net of tax . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) from continuing operations available to common shareholders . . . . . Net income (loss) available to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . Earnings (loss) per common share from continuing operations – basic . . . . . . . . . . Earnings (loss) per common share from continuing operations – diluted . . . . . . . . . Earnings (loss) per common share – basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings (loss) per common share – diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average common stockholders’ equity from continuing operations (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average tangible common stockholders’ equity from continuing operations (non-GAAP) (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average assets from continuing operations (GAAP) . . . . . . . . . . . . . . . . . BALANCE SHEET SUMMARY At year-end—Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans, net of unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average balances—Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans, net of unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SELECTED RATIOS Allowance for loan losses as a percentage of loans, net of unearned income . . . . . . Allowance for credit losses as a percentage of loans, net of unearned income . . . . . Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tier 1 common (non-GAAP) (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tangible common stockholders’ equity to tangible assets (non-GAAP) (1) . . . . . . . . Efficiency ratio (non-GAAP) (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . COMMON STOCK DATA Cash dividends declared per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders' common equity per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market value at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market price range: High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total trading volume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend payout ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders of record at year-end (actual) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average number of common shares outstanding . . . . . . . . . . . . . . . . . . . . Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NM—Not meaningful (1) See Table 2 for GAAP to non-GAAP reconciliations. 51 2011 2010 2009 2008 2007 (In millions, except per share data) $ $ $ $ $ $ $ $ 4,252 $ 4,637 1,248 3,389 2,863 526 2,489 3,859 (844) (376) (468) (41) 30 (71) 842 3,410 1,530 1,880 2,143 3,862 161 (28) 189 (408) (4) (404) (215) $ 5,277 1,984 3,293 3,541 (248) 2,765 3,785 (1,268) (194) (1,074) 66 23 43 (539) $ (1,031) $ (5,596) $ 6,465 2,677 3,788 2,057 1,731 2,132 9,895 (6,032) (383) (5,649) 81 28 53 7,894 3,557 4,337 555 3,782 1,918 3,821 1,879 594 1,285 (58) (24) (34) 1,251 (25) $ (692) $ (1,304) $ (5,675) $ 1,285 (429) $ (763) $ (1,261) $ (5,622) $ 1,251 (0.02) $ (0.02) (0.34) (0.34) (0.56) (0.56) (0.62) (0.62) (1.32) (1.32) (1.27) (1.27) (8.17) (8.17) (8.09) (8.09) 1.81 1.80 1.77 1.76 (0.21)% (5.57)% (10.23)% (31.37)% 6.87% (0.36) (0.02) (9.36) (0.52) (17.13) (0.93) (79.92) (4.04) 17.15 (0.95) $ 77,594 $ 82,864 (3,185) 132,351 94,614 13,190 16,734 (2,745) 127,050 95,627 8,110 16,499 $ 90,674 (3,114) 142,318 98,680 18,464 17,881 $ 97,419 (1,826) 146,248 90,904 19,231 16,813 $ 95,379 (1,321) 141,042 94,775 11,325 19,823 $ 80,673 126,719 95,671 11,240 15,350 86,660 132,720 96,489 15,489 15,916 $ 94,523 139,468 94,612 18,501 16,224 $ 97,601 140,455 90,077 13,422 18,514 $ 94,366 134,693 95,725 9,089 18,721 3.54 3.64 13.28 8.51 16.99 9.91 6.58% 64.56 3.84 3.93 12.40 7.85 16.35 9.30 6.04% 67.74 3.43 3.52 11.54 7.15 15.78 8.90 6.22% 67.88 1.87 1.95 10.38 6.57 14.64 8.47 5.43% 60.67 1.39 1.45 7.29 NM 11.25 6.66 6.13% 54.95 $ 0.04 $ 10.39 4.30 0.04 10.63 7.00 $ 0.13 11.97 5.29 $ 0.96 19.53 7.96 $ 1.46 28.58 23.65 8.09 2.82 5,204 NM 73,659 1,258 1,258 9.33 5.12 6,381 NM 76,996 1,227 1,227 9.07 2.35 8,747 NM 81,166 989 989 25.84 6.41 3,411 NM 83,600 695 695 38.17 22.84 912 82.49 85,060 708 713 2011 OVERVIEW Regions reported a net loss available to common shareholders of $429 million or $0.34 per diluted common share in 2011. A significant driver of 2011 results was a $731 million (net of $14 million income tax impact) goodwill impairment charge related to the Company’s Investment Banking/Brokerage/Trust segment, resulting from the process of selling Morgan Keegan. This impairment charge included $478 million related to discontinued operations and $253 million from continuing operations. Another significant driver of 2011 results included a $44 million income tax benefit related to a regulatory settlement, of which approximately $17 million was associated with continuing operations and $27 million with discontinued operations. Excluding these two items, Regions’ income from continuing operations available to common shareholders was $211 million or $0.17 per diluted common share in 2011. See Table 2 “GAAP to Non-GAAP Reconciliation”. Credit-related costs, primarily the loan loss provision, declined significantly in 2011 as a result of improvements in the credit environment. Average low-cost deposits grew 5 percent leading to a decline in both 2011’s total deposit and funding costs. Net interest income from continuing operations remained stable at $3.4 billion in 2011. The net interest margin (fully-taxable equivalent basis) was 3.07 percent in 2011, compared to 2.91 percent during 2010, primarily due to a reduction in average earning assets. Net interest income was driven primarily by a decrease of 34 basis points in the cost of interest-bearing liabilities, while being partially offset by a 15 basis point decline in the overall yield on interest earning assets. This dynamic reflected efforts to improve deposit costs and pricing on loans, while managing the challenges posed by a low interest rate environment. Long-term interest rates in particular remained low in 2011, pressuring yields on fixed-rate loan and securities portfolios, and contributed to the decline in the yield on taxable securities from 3.66 percent in 2010 to 3.08 percent in 2011. The overall costs of deposits improved from 0.78 percent in 2010 to 0.49 percent in 2011, as short-term interest rates (for example, the Federal Funds rate) remained at historical lows. The product mix of deposits improved as well, as declines in higher cost certificates of deposits accompanied increases in low cost checking and savings products. Although the net interest margin from continuing operations increased in 2011, the factors that have pressured it are likely to persist. These factors include a continuation of persistent, low level of interest rates, elevated non-performing asset levels and costs associated with managing prudent levels of liquidity. However, management expects to see incremental improvement in net interest income and the resulting net interest margin in 2012 as the amount of excess cash reserves and non-performing assets continue to decline. Furthermore, Regions’ balance sheet is in an asset sensitive position such that if economic conditions were to improve more rapidly, thereby resulting in a rise in interest rates, the net interest margin would likely respond favorably. Net charge-offs totaled $2.0 billion, or 2.44 percent of average loans in 2011 compared to $2.8 billion, or 3.22 percent of average loans in 2010. Net charge-offs were lower across most major categories when comparing 2011 to the prior year. Non-performing assets decreased $922 million from December 31, 2010 to December 31, 2011 to $3.0 billion. The provision for loan losses is used to maintain the allowance for loan losses at a level that, in management’s judgment, is appropriate to cover losses inherent in the loan portfolio as of the balance sheet date. During 2011, the provision for loan losses decreased to $1.5 billion compared to $2.9 billion in 2010. The allowance for loan losses was $2.7 billion, or 3.54 percent of loans, at December 31, 2011 as compared to $3.2 billion, or 3.84 percent of loans, at December 31, 2010. Net charge-offs exceeded provision for loan losses for 2011. This relationship resulted from the allowance associated with loans transferred to held for sale and improving consumer credit trends. Credit metrics, including non-accrual, criticized and classified loan balances, and delinquencies showed continued improving trends. Non-interest income from continuing operations decreased to $2.1 billion in 2011 from $2.5 billion in 2010. The year-over-year decrease was due primarily to lower securities gains and leveraged lease termination gains, as well as a decline in mortgage income. However, service charges income was relatively stable in 2011 compared to 2010, despite the impact of Regulation E and the Durbin Amendment. See Table 2 “GAAP to Non-GAAP Reconciliation” and Table 5 “Non-Interest Income” for further details. 52 Non-interest expense from continuing operations totaled $3.9 billion in both 2011 and 2010. Non-interest expenses included a $253 million goodwill impairment charge in 2011 and a $75 million regulatory charge in 2010. The 2011 period included lower salaries and employee benefits due to reduced headcount and lower pension expense, lower occupancy expense and lower credit-related costs. The 2010 period was impacted by a loss on early extinguishment of debt related to prepayment of Federal Home Loan Bank advances. See Table 6, “Non-Interest Expense from Continuing Operations (including Non-GAAP reconciliation)” for further details. Total loans decreased by $5.3 billion, or 6.4 percent in 2011, driven primarily by a strategic decision to lower exposure to investor real estate. Decreases in residential first mortgage and home equity loans also contributed to the year-over-year decrease primarily resulting from consumers’ decisions to de-leverage. These decreases were partially offset by growth in the commercial and industrial category, the purchase of a $1.1 billion credit card portfolio, and increases in indirect loans. Total deposits increased $1.0 billion in 2011 to $95.6 billion at December 31, 2011, and low-cost customer deposits increased $4.4 billion, or 6.2 percent, in 2011. Regions’ Tier 1 capital (regulatory) and Tier 1 common (non-GAAP) ratios were 13.28 percent and 8.51 percent at December 31, 2011. The corresponding Basel III ratios (non-GAAP), based on Regions’ current understanding of the guidelines, were approximately 11.39 percent and 7.70 percent, which exceed the respective Basel III minimums of 8.5 percent and 7 percent (see Table 2, “GAAP to Non-GAAP Reconciliation” for a reconciliation of the non-GAAP measures to the corresponding GAAP or regulatory measure). Table 2 “GAAP to Non-GAAP Reconciliation” presents computations of earnings (loss) and certain other financial measures excluding merger, goodwill impairment and regulatory charge and related income tax benefit; these measures include “fee income ratio”, “efficiency ratio”, “return on average assets from continuing operations”, “return on average tangible common stockholders’ equity from continuing operations”, end of period “tangible common stockholders’ equity” and related ratios, “Tier 1 common equity” and related ratios, and “Basel III ratios”, all of which are non-GAAP measures. Merger, goodwill impairment, and the regulatory charge and related income tax benefit are included in accordance with generally accepted accounting principles (“GAAP”). Regions believes the exclusion of merger, goodwill impairment and regulatory charge and related income tax benefit in expressing earnings and certain other financial measures 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 these charges to be as relevant to ongoing operating results. Management and the Board of Directors utilize these non-GAAP financial measures as follows: • Preparation of Regions’ operating budgets • Monthly financial performance reporting • Monthly close-out reporting of consolidated results (management only) • Presentations to investors of Company performance Regions believes that presenting these non-GAAP financial measures will permit investors to assess the performance of the Company on the same basis as that applied by management and the Board of Directors. The third quarter of 2008 was the final quarter for merger charges related to the AmSouth acquisition. The efficiency ratio (non-GAAP), which is a measure of productivity, is generally calculated as non-interest expense divided by total revenue on a fully-taxable equivalent basis. The fee ratio (non-GAAP) is generally calculated as non-interest income divided by total revenue. Management uses these ratios to monitor performance and believes these measures provide meaningful information to investors. Non-interest expense (GAAP) is presented excluding adjustments to arrive at adjusted non-interest expense (non-GAAP), which is the numerator for the 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 fee ratio. Net interest income on a 53 fully-taxable equivalent basis (GAAP) and non-interest income (GAAP) are added together to arrive at total revenue (GAAP). Adjustments are made to arrive at adjusted total revenue (non-GAAP), which is the denominator for the fee and efficiency ratios. Regions believes that the non-GAAP measures reflecting these adjustments provide 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. It is possible that the activities related to the adjustments may recur; however, 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. Tangible common stockholders’ equity ratios have become a focus of some investors in analyzing the capital position of the Company absent the effects of intangible assets and preferred stock. Traditionally, the Federal Reserve and other banking regulatory bodies have assessed a bank’s capital adequacy based on Tier 1 capital, the calculation of which is codified in federal banking regulations. In connection with the Federal Reserve’s CCAR process, these regulators are supplementing their assessment of the capital adequacy of a bank based on a variation of Tier 1 capital, known as Tier 1 common equity. While not codified, analysts and banking regulators have assessed Regions’ capital adequacy using the tangible common stockholders’ equity and/or the Tier 1 common equity measure. Because tangible common stockholders’ equity and Tier 1 common equity are not formally defined by GAAP or codified in the federal banking regulations, these measures are considered to be non-GAAP financial measures and other entities may calculate them differently than Regions’ disclosed calculations. Since analysts and banking regulators may assess Regions’ capital adequacy using tangible common stockholders’ equity and Tier 1 common equity, Regions believes that it is useful to provide investors information enabling them to assess Regions’ capital adequacy on these same bases. Tier 1 common equity is often expressed as a percentage of risk-weighted assets. Under the risk-based capital framework, a bank’s balance sheet assets and credit equivalent amounts of off-balance sheet items are assigned to one of four broad risk categories. The aggregated dollar amount in each category is then multiplied by the risk weighting assigned to that category. The resulting weighted values from each of the four categories are added together and this sum is the risk-weighted assets total that, as adjusted, comprises the denominator of certain risk-based capital ratios. Tier 1 capital is then divided by this denominator (risk-weighted assets) to determine the Tier 1 capital ratio. Adjustments are made to Tier 1 capital to arrive at Tier 1 common equity (non- GAAP). Tier 1 common equity is also divided by the risk-weighted assets to determine the Tier 1 common equity ratio. The amounts disclosed as risk-weighted assets are calculated consistent with banking regulatory requirements. Regions currently calculates its risk-based capital ratios under guidelines adopted by the Federal Reserve based on the 1988 Capital Accord (“Basel I”) of the Basel Committee on Banking Supervision (the “Basel Committee”). In December 2010, the Basel Committee released its final framework for Basel III, which will strengthen international capital and liquidity regulation. When implemented by U.S. bank regulatory agencies and fully phased-in, Basel III will change capital requirements and place greater emphasis on common equity. Implementation of Basel III will begin on January 1, 2013, and will be phased in over a multi-year period. The U.S. bank regulatory agencies have not yet adopted final regulations governing the implementation of Basel III. Accordingly, the calculations provided below are estimates, based on Regions’ current understanding of the framework, including the Company’s reading of the requirements, and informal feedback received through the regulatory process. Regions’ understanding of the framework is evolving and will likely change as the regulations are finalized. Because the Basel III implementation regulations are not formally defined by GAAP and have not yet been finalized and codified, these measures are considered to be non-GAAP financial measures, and other entities may calculate them differently from Regions’ disclosed calculations. Since analysts and banking regulators may assess Regions’ capital adequacy using the Basel III framework, Regions believes that it is useful to provide investors information enabling them to assess Regions’ capital adequacy on the same basis. 54 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 the merger, goodwill impairment and regulatory charge and related income tax benefit does not represent the amount that effectively accrues directly to stockholders (i.e., the merger, goodwill impairment and regulatory charge are a reduction to earnings and stockholders’ equity). The following tables provide: 1) a reconciliation of net income (loss) available to common shareholders (GAAP) to income (loss) from continuing operations available to common shareholders, 2) income (loss) from continuing operations available to common shareholders to income (loss) from continuing operations available to common shareholders, excluding merger, goodwill impairment and regulatory charge and related income tax benefit (non-GAAP), 3) a reconciliation of earnings (loss) per common share from continuing operations (GAAP) to earnings (loss) per common share from continuing operations, excluding merger, goodwill impairment and regulatory charge and related income tax benefit (non-GAAP), 4) a reconciliation of non-interest expense from continuing operations (GAAP) to adjusted non-interest expense (non-GAAP), 5) a reconciliation of non-interest income from continuing operations (GAAP) to adjusted non-interest income (non-GAAP), 6) a computation of adjusted total revenue (non-GAAP), 7), a computation of the fee income ratio (non-GAAP), 8) a computation of the efficiency ratio (non-GAAP), 9) a computation of return on average assets from continuing operations, excluding merger, goodwill impairment and regulatory charge and related income tax benefit (non- GAAP), 10) a reconciliation of average and ending stockholders’ equity (GAAP) to average and ending tangible common stockholders’ equity (non-GAAP) and calculations of related ratios, excluding discontinued operations, merger, goodwill impairment and regulatory charge and related income tax benefit (non-GAAP), 11) a reconciliation of stockholders’ equity (GAAP) to Tier 1 capital (regulatory) and to Tier 1 common equity (non- GAAP) and calculations of related ratios, and 12) a reconciliation of stockholders’ equity (GAAP) to Basel III Tier 1 capital (non-GAAP), Basel III total capital (non-GAAP) and Basel III Tier 1 common (non-GAAP) and calculations of related ratios. 55 159 34 5 153 351 219 — — $1,504 713 $ 1.75 Table 2—GAAP to Non-GAAP Reconciliation INCOME (LOSS) Net income (loss) (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred dividends and accretion (GAAP) . . . . . . . . . . . . . . . . . . Net income (loss) available to common shareholders (GAAP) . . . Income (loss) from discontinued operations, net of tax (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Income (loss) from continuing operations available to common For Years Ended December 31 2011 2010 2009 2008 2007 (In millions, except per share data) $ (215) (214) (429) (404) $ (539) (224) (763) $(1,031) (230) (1,261) $(5,596) (26) (5,622) $1,251 — 1,251 (71) 43 53 (34) shareholders (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B $ (25) $ (692) $(1,304) $(5,675) $1,285 $ (25) $ (692) $(1,304) $(5,675) $1,285 Income (loss) from continuing operations available to common shareholders (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Merger-related charges, pre-tax: Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . Net occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and equipment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Total merger-related charges, pre-tax . . . . . . . . . . . . . . . . . . Merger-related charges, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory charge and related income tax benefit (1) . . . . . . . . . . . Income (loss) from continuing operations available to common shareholders, excluding merger, goodwill impairment and regulatory charge and related income tax benefit (non-GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — — 253 (17) — — — — — — — 75 — — — — — — — — 134 4 5 58 201 125 6,000 — C $ 211 $ (617) $(1,304) $ 450 Weighted-average diluted shares . . . . . . . . . . . . . . . . . . . . . . . . . . D Earnings (loss) per common share – diluted (GAAP) . . . . . . . . . . A/D 1,258 $ (0.34) 1,227 $ (0.62) 989 $ (1.27) 695 $ (8.09) Earnings (loss) per common share from continuing operations – diluted (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B/D $ (0.02) $ (0.56) $ (1.32) $ (8.16) $ 1.80 Earnings (loss) per common share from continuing operations, excluding merger, goodwill impairment and regulatory charge and related income tax benefit—diluted (non-GAAP) . . . . . . . C/D EFFICIENCY AND FEE INCOME RATIOS Non-interest expense from continuing operations (GAAP) . . . . . . Adjustments: Merger-related charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage servicing rights impairment . . . . . . . . . . . . . . . . . . Loss on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . FDIC special assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities impairment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . Branch consolidation and property and equipment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.17 $ (0.50) $ (1.32) $ 0.65 $ 2.11 $3,862 $3,859 $ 3,785 $ 9,895 $3,821 — (253) — — — — (2) (75) — — (75) — (108) — (2) (8) — — — — — (64) (75) (53) (201) (6,000) — (85) (66) — (23) — (351) — — (6) — — (7) — Adjusted non-interest expense (non-GAAP) . . . . . . . . . . . . . . . . . E $3,532 $3,666 $ 3,593 $ 3,520 $3,457 Net interest income from continuing operations, fully- taxable equivalent basis (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-interest income from continuing operations (GAAP) . . . . . . Adjustments: Securities (gains) losses, net . . . . . . . . . . . . . . . . . . . . . . . . . Leveraged lease termination gains . . . . . . . . . . . . . . . . . . . . . Visa-related gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on early extinguishment of debt Gain on sale of mortgage loans . . . . . . . . . . . . . . . . . . . . . . . $3,445 2,143 $3,421 2,489 $ 3,325 2,765 $ 3,825 2,132 $4,364 1,918 (112) (8) — — 3 (394) (78) — — (26) (69) (587) (80) (61) — (92) — (63) — — 9 — — — — Adjusted non-interest income (non-GAAP) . . . . . . . . . . . . . . . . . Adjusted total revenue (non-GAAP) . . . . . . . . . . . . . . . . . . . . . . . F G 2,026 $5,471 1,991 $5,412 1,968 1,977 $ 5,293 $ 5,802 1,927 $6,291 Fee income ratio (non-GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . F/G Efficiency ratio (non-GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E/G 37.03% 64.56% 36.79% 67.74% 37.18% 67.88% 34.07% 60.67% 30.63% 54.95% 56 RETURN ON AVERAGE ASSETS FROM CONTINUING OPERATIONS (2) . . . . . . . . . . . Average assets (GAAP)—continuing operations (2) Return on average assets from continuing operations (GAAP) . . . Return on average assets from continuing operations, excluding merger, goodwill impairment and regulatory charge and related income tax benefit (non-GAAP) . . . . . . . . . . . . . . . . . . RETURN ON AVERAGE TANGIBLE COMMON STOCKHOLDERS’ EQUITY FROM CONTINUING OPERATIONS (3) Average stockholders’ equity (GAAP)—continuing operations (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Average intangible assets (GAAP)—continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average deferred tax liability related to intangibles (GAAP)—continuing operations . . . . . . . . . . . . . . . . . . . . Average preferred equity (GAAP)—continuing For Years Ended December 31 2011 2010 2009 2008 2007 (In millions, except per share data) H B/ H C/ H $ 126,719 $ 132,720 $ 139,468 $ 140,455 $ 134,693 (0.02%) (0.52%) (0.93%) (4.04%) 0.95% 0.17% (0.46%) (0.93%) 0.32% 1.12% $ 15,350 $ 15,916 $ 16,224 $ 18,514 $ 18,721 5,261 5,295 5,411 11,309 11,597 (226) (254) (285) (321) 425 (370) — operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,398 3,479 3,487 Average tangible common stockholders’ equity (non-GAAP)— continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I $ 6,917 $ 7,396 $ 7,611 $ 7,101 $ 7,494 Return on average tangible common equity from continuing operations (non-GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B/I (0.36%) (9.36%) (17.13%) (79.92%) 17.15% Return on average tangible common equity from continuing operations, excluding merger, goodwill impairment and regulatory charge and related income tax benefit (non-GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TANGIBLE COMMON RATIOS Ending stockholders’ equity (GAAP) . . . . . . . . . . . . . . . . . . . . Less: Ending intangible assets (GAAP) . . . . . . . . . . . . . . . . . . . Ending deferred tax liability related to intangibles (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ending preferred equity (GAAP) . . . . . . . . . . . . . . . . . . . . C/I 3.05% (8.34%) (17.13%) 6.34% 20.07% $ 16,499 5,265 $ 16,734 5,946 $ 17,881 6,060 $ 16,813 6,186 $ 19,823 12,252 (200) 3,419 (240) 3,380 (269) 3,602 (303) 3,307 (339) — Ending tangible common stockholders’ equity (non-GAAP) . . J $ 8,015 $ 7,648 $ 8,488 $ 7,623 $ 7,910 Ending total assets (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Ending intangible assets (GAAP) . . . . . . . . . . . . . . . . . . . Ending deferred tax liability related to intangibles 127,050 5,265 132,351 5,946 142,318 6,060 146,248 6,186 141,042 12,252 (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (200) (240) (269) (303) (339) Ending tangible assets (non-GAAP) . . . . . . . . . . . . . . . . . . . . . K $121,985 $126,645 $136,527 $140,365 $129,129 End of period shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . Tangible common stockholders’ equity to tangible assets (non-GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tangible common book value per share (non-GAAP) L J/K J/L 1,259 1,256 1,193 691 694 6.58% 6.37 $ 6.04% 6.09 $ 6.22% 7.11 $ 5.43% 11.03 $ 6.13% 11.40 $ 57 2011 For Years Ended December 31 2009 (In millions, except per share data) 2008 2010 2007 TIER 1 COMMON RISK-BASED RATIO Stockholders’ equity (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive (income) loss . . . . . . . . . . . . . . . . . . . Non-qualifying goodwill and intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . Disallowed deferred tax assets (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disallowed servicing assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Qualifying non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Qualifying trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tier 1 capital (regulatory) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Qualifying non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Qualifying trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,499 69 (4,900) (432) (35) 92 846 12,139 (92) (846) (3,419) $16,734 260 (5,706) (424) (27) 92 846 11,775 (92) (846) (3,380) $ 17,881 (130) (5,792) (947) (25) 91 846 $ 16,813 8 (5,864) — (16) 91 1,036 11,924 (91) (846) (3,602) 12,068 (91) (1,036) (3,307) Tier 1 common equity (non-GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M $ 7,782 $ 7,457 $ 7,385 $ 7,634 Risk-weighted assets (regulatory) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tier 1 common risk-based ratio (non-GAAP) . . . . . . . . . . . . . . . . . . . . . . M/N N $91,449 $94,966 $103,330 $116,251 8.51% 7.85% 7.15% 6.57% BASEL III RATIOS Stockholders’ equity (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-qualifying goodwill and intangibles (5) . . . . . . . . . . . . . . . . . . . . . . . . Adjustments, including other comprehensive income related to cash flow hedges, disallowed deferred tax assets, threshold deductions and other adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Qualifying non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basel III tier 1 capital (non-GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basel III tier 1 capital (non-GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Qualifying non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . O $16,499 (5,065) (854) 10,580 4 10,584 10,584 (3,419) (4) Basel III tier 1 common (non-GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P $ 7,161 Basel I risk-weighted assets (regulatory) . . . . . . . . . . . . . . . . . . . . . . . . . . Basel III risk-weighted assets (non-GAAP) (6) . . . . . . . . . . . . . . . . . . . . . . Basel III tier 1 capital ratio (non-GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . O/Q $91,449 Q $92,935 11.39% Basel III tier 1 common ratio (non-GAAP) . . . . . . . . . . . . . . . . . . . . . . . . P/Q 7.70% (1) In the second quarter of 2010, Regions recorded a $200 million charge to account for a probable, reasonably estimable loss related to a pending settlement of regulatory matters. At that time, Regions assumed that the entire charge would be non-deductible for income tax purposes. $75 million of the regulatory charge relates to continuing operations. The regulatory settlement was finalized in the second quarter of 2011. At the time of the settlement, Regions had better information related to the income tax implications. $125 million of the approximately $200 million settlement charge will be deductible for federal income tax purposes. Accordingly, during the second quarter of 2011, Regions adjusted income tax expense to account for the impact of the deduction. The adjustment reduced total income tax expense by approximately $44 million for the second quarter of 2011, of which approximately $17 million relates to continuing operations. (2) Return on assets from continuing operations does not include average assets related to discontinued operations of $3,254 million, $3,235 million, $3,291 million, $3,492 million and $4,064 million for December 31, 2011, 2010, 2009, 2008 and 2007, respectively. (3) Return on average tangible common stockholders’ equity from continuing operations does not include net assets related to discontinued operations of $1,035 million, $1,512 million, $1,569 million, $1,514 million and $1,304 million for December 31, 2011, 2010, 2009, 2008 and 2007, respectively. (4) Only one year of projected future taxable income may be applied in calculating deferred tax assets for regulatory capital purposes. (5) Under Basel III, regulatory capital must be reduced by purchased credit card relationship intangible assets. These assets are partially allowed in Basel I capital. (6) Regions continues to develop systems and internal controls to precisely calculate risk-weighted assets as required by Basel III. The amount included above is a reasonable approximation, based on Regions’ understanding of the requirements. 58 CRITICAL ACCOUNTING POLICIES AND ESTIMATES 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 accounting principles generally accepted in the U.S. and general banking practices. Estimates and assumptions most significant to Regions are related primarily to the allowance for credit losses, fair value measurements, intangible assets (goodwill and other identifiable intangible assets), mortgage servicing rights and income taxes, and are summarized in the following discussion and in the notes to the consolidated financial statements. Allowance for Credit Losses The allowance for credit losses (“allowance”) consists of the allowance for loan losses and the reserve for unfunded credit commitments. These two components reflect management’s judgment of probable credit losses inherent in the portfolio and unfunded credit commitments at the balance sheet date. A full discussion of these estimates and other factors is included in the “Allowance for Credit Losses” section within the discussion of “Credit Risk”, found in a later section of this report, and Note 6 “Allowance for Credit Losses” to the consolidated financial statements. The allowance is sensitive to a variety of internal factors, such as portfolio performance and assigned risk ratings, as well as external factors, such as interest rates and the general health of the economy. Management reviews different assumptions for variables that could result in increases or decreases in probable inherent credit losses, which may materially impact Regions’ estimate of the allowance and results of operations. Management’s estimate of the allowance for the commercial and investor real estate portfolio segments could be affected by estimates of losses inherent in various product types as a result of fluctuations in the general economy, developments within a particular industry, or changes in an individual’s credit due to factors particular to that credit, such as competition, management or business performance. For non-accrual commercial and investor real estate loans equal to or greater than $2.5 million, the allowance for loan losses is based on specific evaluation considering the facts and circumstances specific to each borrower. For all other commercial and investor real estate loans, the allowance for loan losses is based on statistical models using a probability of default (“PD”) and a loss given default (“LGD”). Historical default information for similar loans is used as an input for the statistical model. A 5 percent increase in the PD for non-defaulted accounts and a 5 percent increase in the LGD for all accounts would result in an increase to estimated losses of approximately $125 million. For residential real estate mortgages, home equity lending and other consumer-related loans, individual products are reviewed on a group basis or in loan pools (e.g., residential real estate mortgage pools). Losses can be affected by such factors as collateral value, loss severity, the economy and other uncontrollable factors. A 5 percent increase or decrease in the estimated loss rates on these loans would change estimated inherent losses by approximately $35 million. Additionally, the estimate of the allowance for the entire portfolio may change due to modifications in the mix and level of loan balances outstanding and general economic conditions, as evidenced by changes in real estate demand and values, interest rates, unemployment rates, bankruptcy filings, fluctuations in the gross domestic product, and the effects of weather and natural disasters such as droughts and hurricanes. Each has the ability to result in actual loan losses that could differ from originally estimated amounts. The pro forma inherent loss analysis presented above demonstrates the sensitivity of the allowance to key assumptions. This sensitivity analysis does not reflect an expected outcome. For additional information regarding the allowance for credit losses calculation, see Note 6 “Allowance For Credit Losses” to the consolidated financial statements. 59 Fair Value Measurements A portion of the Company’s assets and liabilities is carried at fair value, with changes in fair value recorded either in earnings or accumulated other comprehensive income (loss). These include trading account assets and liabilities, securities available for sale, mortgage loans held for sale, mortgage servicing rights and derivative assets and liabilities. From time to time, the estimation of fair value also affects other loans held for sale, which are recorded at the lower of cost or fair value. Fair value determination is also relevant for certain other assets such as foreclosed property and other real estate, which are recorded at the lower of the recorded investment in the loan/property or fair value, less estimated costs to sell the property. For example, the fair value of other real estate is determined based on recent appraisals by third parties and other market information, less estimated selling costs. Adjustments to the appraised value are made if management becomes aware of changes in the fair value of specific properties or property types. The determination of fair value also impacts certain other assets that are periodically evaluated for impairment using fair value estimates, including goodwill, other identifiable intangible assets and impaired loans. Fair value is generally defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) as opposed to the price that would be paid to acquire the asset or received to assume the liability (an entry price), in an orderly transaction between market participants at the measurement date under current market conditions. While management uses judgment when determining the price at which willing market participants would transact when there has been a significant decrease in the volume or level of activity for the asset or liability in relation to “normal” market activity, management’s objective is to determine the point within the range of fair value estimates that is most representative of a sale to a third-party investor under current market conditions. The value to the Company if the asset or liability were held to maturity is not included in the fair value estimates. A fair value measure should reflect the assumptions that market participants would use in pricing the asset or liability, including the assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. Fair value is measured based on a variety of inputs the Company utilizes. Fair value may be based on quoted market prices for identical assets or liabilities traded in active markets (Level 1 valuations). If market prices are not available, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market are used (Level 2 valuations). Where observable market data is not available, the valuation is generated from model-based techniques that use significant assumptions not observable in the market, but observable based on Company-specific data (Level 3 valuations). These unobservable assumptions reflect the Company’s own estimates for assumptions that market participants would use in pricing the asset or liability. Valuation techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability. See Note 1 “Summary of Significant Accounting Policies” to the consolidated financial statements for a detailed discussion of determining fair value, including pricing validation processes. Intangible Assets Regions’ intangible assets consist primarily of the excess of cost over the fair value of net assets of acquired businesses (“goodwill”) and other identifiable intangible assets (primarily core deposit intangibles and purchased credit card relationships). Goodwill totaled $4.8 billion at December 31, 2011 and $5.6 billion at December 31, 2010 and is allocated to each of Regions’ reportable segments (each a reporting unit), at which level goodwill is tested for impairment on an annual basis as of October 1 or more often if events and circumstances indicate impairment may exist (refer to Note 1 “Significant Accounting Policies” to the consolidated financial statements for further discussion of when Regions tests goodwill for impairment). A test of goodwill for impairment consists of two steps. In Step One, the fair value of the reporting unit is compared to its carrying amount. To the extent that the fair value of the reporting unit exceeds the carrying value, 60 impairment is not indicated and no further testing is required. Conversely, if the fair value of the reporting unit is below its carrying amount, Step Two must be performed. Step Two consists of determining the implied fair value of goodwill, which is the net difference between the after-tax valuation of assets and liabilities and the fair value of the reporting unit (from Step One). Adverse changes in the economic environment, declining operations of the reporting unit, or other factors could result in a decline in the estimated implied fair value of goodwill. If the estimated implied fair value is less than the carrying amount, a loss would be recognized to reduce the carrying amount to the estimated implied fair value. The fair value of the reporting unit is determined using two approaches and several key assumptions. Regions utilizes the Capital Asset Pricing Model (CAPM) in order to derive the base discount rate. The inputs to the CAPM include the 20-year risk-free rate, 5-year beta for a select peer set, and the market risk premium based on published data. Once the output of the CAPM is determined, a size premium is added (also based on a published source) as well as a company-specific risk premium, which is an estimate determined by the Company and meant to compensate for the risk inherent in the future cash flow projections and inherent differences (such as business model and market perception of risk) between Regions and the peer set. The table below summarizes the discount rate used in the goodwill impairment tests of the Banking/Treasury reporting unit for the reporting periods indicated: Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15% 15% 15% 15% 15% 4th Quarter 2011 3rd Quarter 2011 2nd Quarter 2011 1st Quarter 2011 4th Quarter 2010 In estimating future cash flows, a balance sheet as of the test date and a statement of operations for the last twelve months of activity for the reporting unit are compiled. From that point, future balance sheets and statements of operations are projected based on the inputs discussed below. Cash flows are based on expected future capitalization requirements due to balance sheet growth and anticipated changes in regulatory capital requirements. The baseline cash flows utilized in all models correspond to the most recent internal forecasts and/ or budgets that range from 1 to 5 years. These internal forecasts are based on inputs developed in the Company’s capital planning processes. Refer to the discussion of intangible assets in Note 1 “Summary of Significant Accounting Policies” to the consolidated financial statements for a discussion of these approaches and Note 9 “Intangible Assets” for a discussion of the assumptions. The fair values of assets and liabilities are determined using an exit price concept. Refer to the discussion of fair value in Note 1 “Summary of Significant Accounting Policies” to the consolidated financial statements for discussions of the exit price concept and the determination of fair values of financial assets and liabilities. Throughout 2009 and 2010 in the Banking/Treasury reporting unit, the credit quality of Regions’ loan portfolio declined, which contributed to increased losses as well as elevated non-performing loan levels. Accordingly, Regions performed tests of goodwill for impairment during each quarter of 2010 and during the second, third and fourth quarters of 2009 in a manner consistent with the test conducted in the fourth quarter of 2008. Regions continued to perform its goodwill impairment tests during the four quarters of 2011, in a manner consistent with the tests conducted in prior periods, primarily due to the Company’s market capitalization remaining below book value. The long-term fair value of equity was determined using both income and market approaches (discussed in Note 9 “Intangible Assets”). The results of these calculations indicated that the fair value of the Banking/Treasury reporting unit was less than the carrying amount. At October 1, 2011, the carrying amount and fair value of the Banking/Treasury reporting unit were $12.0 billion and $7.6 billion, respectively, while the carrying amount of goodwill for the reporting unit was $4.7 billion. Therefore, Step Two of the goodwill impairment test was performed. In Step Two, the fair values of the reporting unit’s assets and liabilities, including the loan portfolio, intangible assets, time deposits, debt, and other assets and liabilities were calculated. Once the fair values were determined, deferred tax adjustments were calculated as applicable. For the Banking/ Treasury reporting unit, the after-tax effects of the Step Two adjustments, which were primarily write-downs of 61 assets to fair value, exceeded any reductions in the value of common equity determined in Step One; accordingly the calculation of implied goodwill exceeded its carrying amount. Therefore, the results were no impairment for the Banking/Treasury reporting unit, whose implied fair value of goodwill exceeded its carrying amount by approximately 12 percent as of October 1, 2011 compared to approximately 29 percent as of fourth quarter 2010. Since the third quarter of 2009, the fair values of net assets and liabilities of the Banking/Treasury reporting unit have increased faster than the fair value of equity of this reporting unit. Should the fair values of net assets continue to increase more rapidly than the fair value of this reporting unit, goodwill could be impaired in future periods. During the third and fourth quarters of 2011, Regions experienced a significant decline in market capitalization relative to prior periods. The large-cap banking sector also experienced a decline in market capitalization albeit not as significant as that of Regions. This resulted in price-to-tangible book values declining and resulted in an overall value conclusion for the Banking/Treasury reporting unit that would be indicative of a distressed sale in the public company method. Accordingly, Regions increased the control premium utilized in the public company method from 30 percent in 2010 to 55 percent in the test conducted in the fourth quarter of 2011. The higher control premium was evidenced by market transactions occurring in 2010. See attached sensitivity tables for additional information. For the Investment Banking/Brokerage/Trust reporting unit, Regions performed and passed Step One of the goodwill impairment test as of the annual test date in the fourth quarter of 2011. Subsequent to that test, Regions received bids later in the fourth quarter from buyers interested in purchasing the Morgan Keegan component of the Investment Banking/Brokerage/Trust reporting unit; these bids were significantly below the value indications received from bidders as of October 1, 2011. The collapse and bankruptcy of a large brokerage firm and subsequent market disruptions that occurred in November of 2011 as a result impacted the significant price declines related to this component. Accordingly, Regions tested the goodwill of the Investment Banking/ Brokerage/Trust reporting unit as of December 15, 2011, resulting in the reporting unit failing Step One. As a result, Regions conducted Step Two for this reporting unit, which indicated impairment of all of the $745 million of goodwill allocated to the Investment Banking/Brokerage/Trust reporting unit. Apart from the observed decline in the equity value of the reporting unit, the primary drivers of the impairment were recognition of customer and other identifiable intangibles in Step Two that are not required to be recognized in the GAAP financial statements of the reporting unit that must be calculated in the Step Two in the goodwill impairment test. The pre-tax $745 million impairment charge was allocated between continuing operations ($253 million) and discontinued operations ($492 million) based on relative fair values of the equity of the two components of the reporting unit. The goodwill impairment charge is a non-cash item that does not have an adverse impact on regulatory capital. Specific factors as of the date of filing the financial statements that could negatively impact the assumptions used in assessing goodwill for impairment include: a protracted decline in the Company’s market capitalization, disparities in the level of fair value changes in net assets compared to equity, adverse business trends resulting from litigation and/or regulatory actions, higher loan losses, lengthened forecasts of higher unemployment relative to pre-crisis levels beyond 2013, future increased minimum regulatory capital requirements above current thresholds (refer to Note 13 “Regulatory Capital Requirements and Restrictions” for a discussion of current minimum regulatory requirements), future federal rules and regulations resulting from the Dodd-Frank Act, and/or a protraction in the current low level of interest rates significantly beyond 2014. 62 The following tables present an analysis of independent changes in market factors or significant assumptions that could adversely impact the carrying balance of goodwill in the Banking/Treasury reporting unit and the outcome of the Step One tests for the Insurance reporting unit: Banking/Treasury Reporting Unit Change in Discount Rate + 0.75% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . + 1.75% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . + 2.75% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in Tangible Book Value Mulipliers (b) (34)% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55% Public Company Method Control Premium Changed To 3% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Improvement in Loan Fair Values + 1.10 Percentage Points . . . . . . . . . . . . . . . . . . . . . . . . . . + 2.10 Percentage Points . . . . . . . . . . . . . . . . . . . . . . . . . . + 3.10 Percentage Points . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated Amount of Impairment (In millions) $ (a) (558) (1,007) $ $ $ (a) (a) (a) (478) (967) (a) Represents the point at which the implied fair value of goodwill would approximate its carrying value. (b) Represents a 34 percent decline in both tangible book value multipliers of 0.7x and 1.1x for the public company method and the transaction method, respectively. The 0.7x multiplier for the public company method is before the 55 percent control premium utilized for this metric. See Note 9 for further details. Impact to Step One Conclusion Insurance Reporting Unit Change in Discount Rate + 1% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . + 2% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . + 3% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in Market Approach Mulipliers (c) - 10% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 20% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 30% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 40% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact of Change Insurance Pass Pass Pass Pass Pass Pass Pass (c) For Insurance, represents the percent decline in the 13.0x multiplier for the last twelve months of net income. The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in implied fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of an adverse variation in a particular assumption on the implied fair value of goodwill is calculated without changing any other assumption, while in reality changes in one factor may result in changes in another which may either magnify or counteract the effect of the change. 63 Other identifiable intangible assets, primarily core deposit intangibles and credit card intangibles, are reviewed at least annually (usually in the fourth quarter) for events or circumstances which could impact the recoverability of the intangible asset. These events could include loss of core deposits, significant losses of credit card accounts and/or balances, increased competition or adverse changes in the economy. To the extent an other identifiable intangible asset is deemed unrecoverable, an impairment loss would be recorded to reduce the carrying amount. These events or circumstances, if they occur, could be material to Regions’ operating results for any particular reporting period but the potential impact cannot be reasonably estimated. Mortgage Servicing Rights Regions estimates the fair value of its mortgage servicing rights in order to record them at fair value on the balance sheet. Although sales of mortgage servicing rights do occur, mortgage servicing rights do not trade in an active market with readily observable market prices and the exact terms and conditions of sales may not be readily available, and are therefore Level 3 valuations in the fair value hierarchy previously discussed in the “Fair Value Measurements” section. Specific characteristics of the underlying loans greatly impact the estimated value of the related mortgage servicing rights. As a result, Regions stratifies its mortgage servicing portfolio on the basis of certain risk characteristics, including loan type and contractual note rate, and values its mortgage servicing rights using discounted cash flow modeling techniques. These techniques require management to make estimates regarding future net servicing cash flows, taking into consideration historical and forecasted mortgage loan prepayment rates, discount rates, escrow balances and servicing costs. Changes in interest rates, prepayment speeds or other factors impact the fair value of mortgage servicing rights which impacts earnings. Based on a hypothetical sensitivity analysis, Regions estimates that a reduction in primary mortgage market rates of 25 basis points and 50 basis points would reduce the December 31, 2011 fair value of mortgage servicing rights by approximately 11 percent ($20 million) and 21 percent ($38 million), respectively. Conversely, 25 basis point and 50 basis point increases in these rates would increase the December 31, 2011 fair value of mortgage servicing rights by approximately 12 percent ($21 million) and 24 percent ($43 million), respectively. Regions also estimates that an increase in servicing costs of approximately $10 per loan, or 17 percent, would result in a decline in the value of the mortgage servicing rights by approximately $7 million or 2 basis points. The pro forma fair value analysis presented above demonstrates the sensitivity of fair values to hypothetical changes in primary mortgage rates. This sensitivity analysis does not reflect an expected outcome. Refer to the “Mortgage Servicing Rights” discussion in the “Balance Sheet” analysis section found later in this report. Income Taxes Accrued income taxes are reported as a component of either other assets or other liabilities, as appropriate, in the consolidated balance sheets and reflect management’s estimate of income taxes to be paid or received. Deferred income taxes represent the amount of future income taxes to be paid or received and are accounted for using the asset and liability method. The net balance is reported in other assets in the consolidated balance sheets. The Company determines the realization of the deferred tax asset based upon an evaluation of the four possible sources of taxable income: 1) the future reversals of taxable temporary differences; 2) future taxable income exclusive of reversing temporary differences and carryforwards; 3) taxable income in prior carryback years; and 4) tax-planning strategies. In projecting future taxable income, the Company utilizes forecasted pre-tax earnings, adjusts for the estimated book-tax differences and incorporates assumptions, including the amounts of income allocable to taxing jurisdictions. These assumptions require significant judgment and are consistent with the plans and estimates the Company uses to manage the underlying businesses. The realization of the deferred tax assets could be reduced in the future if these estimates are significantly different than forecasted. For a detailed discussion of realization of deferred tax assets, refer to the “Income Taxes” section found later in this report. The Company is subject to income tax in the U.S. and multiple state and local jurisdictions. The tax laws and regulations in each jurisdiction may be interpreted differently in certain situations, which could result in a 64 range of outcomes. Thus, the Company is required to exercise judgment regarding the application of these tax laws and regulations. The Company will evaluate and recognize tax liabilities related to any tax uncertainties. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is different from the current estimate of the tax liabilities. The Company’s estimate of accrued income taxes, deferred income taxes and income tax expense can also change in any period as a result of new legislative or judicial guidance impacting tax positions, as well as changes in income tax rates. Any changes, if they occur, can be significant to the Company’s financial position, results of operations or cash flows. OPERATING RESULTS GENERAL For 2011, Regions reported a net loss available to common shareholders of $429 million, or $0.34 per diluted common share. In January 2012, Regions entered into an agreement to sell Morgan Keegan to Raymond James Financial, Inc. The results of the entities being sold are presented as discontinued operations. Refer to Note 3 “Discontinued Operations” of the consolidated financial statements for additional information. Regions reported a loss from continuing operations available to common shareholders of $25 million, or $0.02 per diluted common share in 2011. Regions’ net loss from discontinued operations was $404 million, or $0.32 per diluted common share. Regions’ 2011 results were impacted by a $731 million (net of $14 million income tax impact) non-cash goodwill impairment charge related to Regions’ Investment Banking/Brokerage/Trust reporting segment. Based on a relative fair value allocation, $253 million of the impairment charges was recorded within continuing operations and $478 million was recorded within discontinued operations. Regions’ 2011 results also included a $44 million income tax benefit related to a regulatory settlement, of which approximately $17 million was associated with continuing operations and $27 million with discontinued operations. Excluding these two items, Regions’ income from continuing operations available to common shareholders was $211 million, or $0.17 per diluted common share in 2011. See Table 2 “GAAP to non-GAAP Reconciliation”. Regions’ results reflected higher net interest income, lower non-interest expenses and a significant decline in its provision for loan losses. These items were partially offset by lower non-interest income. NET INTEREST INCOME AND MARGIN Net interest income (interest income less interest expense) is Regions’ principal source of income and is one of the most important elements of Regions’ ability to meet its overall performance goals. Net interest income on a fully taxable-equivalent basis increased approximately $24 million, or 1 percent in 2011, from 2010 despite a 5 percent decrease in the level of average earning assets, from $117.5 billion in 2010 to $112.2 billion in 2011. The increase in net interest income was sufficient to offset the impact of the smaller balance sheet, and resulted in the net interest margin increasing to 3.07 percent in 2011 from 2.91 percent in 2010. Comparing 2011 to 2010, interest-earning asset yields were lower, decreasing 15 basis points on average. However, interest-bearing liability rates were also lower, declining by 34 basis points, more than offsetting the drop in interest-earning asset yields. As a result, the net interest rate spread increased 19 basis points to 2.78 percent in 2011 compared to 2.59 percent in 2010. Continued low levels of long-term interest rates affected interest-earning asset yields through their influence on the behavior and pricing of both variable-rate and fixed-rate loans and securities. Longer-term rates were impacted by Federal Reserve actions which in effect lowered long-term interest rates. The yield on the benchmark 10-year U.S. Treasury note ranged from a high of 3.74 percent to a low of 1.72 percent, and for the year decreased 142 basis points, ending the year at 1.88 percent. Persistently low long-term rates can incent 65 fixed-rate borrowers to accelerate reductions or prepayments of existing loans and securities, which can result in the replacement of these at lower rates of interest. This pressure impacts portfolios that have a significant concentration of fixed-rate loans. The taxable investment securities portfolio, which contains significant residential fixed-rate exposure, for example, decreased in yield from 3.66 percent in 2010 to 3.08 percent in 2011. The negative influence of low, long-term interest rates on the net interest margin, however, was offset by improvements in liability costs. The Federal funds rate and the prime rate, which are influential drivers of loan and deposit pricing on the shorter end of the yield curve, remained low at approximately 0.25 percent and 3.25 percent, respectively, throughout 2011, essentially unchanged from the previous year-end level. The Company’s loan pricing is also influenced by the 30-day London Interbank Offering Rate (“LIBOR”), which, on average, was 4 basis points lower in 2011 than 2010, but ranged from a high of 0.30 percent to a low of 0.19 percent during 2011 and ended the year at 0.30 percent. The 2-year U.S. Treasury benchmark yield is a driver of deposit pricing on the shorter end of the yield curve, and it also remained low in 2011. The yield on the benchmark 2-year U.S. Treasury note ranged from a high of 0.85 percent to a low of 0.16 percent, and for the year decreased 36 basis points, ending the year at 0.24 percent. With short-term interest rates remaining low, deposit costs improved considerably from 0.78 percent in 2010 to 0.49 percent in 2011. There was substantial improvement in costs in every deposit category, including average money market accounts which declined from 0.43 percent to 0.29 percent. The improvement in overall deposit costs was also attributable to a less costly mix of deposits. For example, average time deposits declined from $26.3 billion, or 27.2 percent of total average deposits, in 2010 to $21.6 billion, or 22.6 percent of total average deposits, in 2011. Meanwhile, average non-interest bearing customer deposits increased from $24.0 billion in 2010 to $27.7 billion in 2011. 66 Table 3 “Consolidated Average Daily Balances and Yield/Rate Analysis for Continuing Operations” presents a detail of net interest income (on a fully taxable-equivalent basis) the net interest margin, and the net interest spread. Table 3—Consolidated Average Daily Balances and Yield/Rate Analysis for Continuing Operations Assets Interest-earning assets: 2011 2010 2009 Average Balance Income/ Expense Yield/ Rate Average Balance Income/ Expense Yield/ Rate Average Balance Income/ Expense Yield/ Rate (Dollars in millions; yields on taxable-equivalent basis) Federal funds sold and securities purchased under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . $ Trading account assets . . . . . . . . . . . . . . . . . . . . . . . . . Securities: Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans, net of unearned income (1) (2) . . . . . . . . . . . . . . Other interest-earning assets . . . . . . . . . . . . . . . . . . . . 24,586 31 1,131 80,673 5,623 Total interest-earning assets . . . . . . . . . . . . . . Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . Other non-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . 112,214 (3,114) 1,988 15,631 $126,719 Liabilities and Stockholders’ Equity Interest-bearing liabilities: 4 166 $ — 4 — %$ 2.41 $ 377 175 2 7 0.53%$ 4.00 124 506 $ — 25 — % 4.94 758 — 35 3,477 13 4,287 3.08 — 3.09 4.31 0.23 3.82 23,851 44 1,281 86,660 5,119 117,507 (3,187) 2,021 16,379 $132,720 873 1 39 3,734 13 4,669 3.66 2.27 3.04 4.31 0.25 3.97 20,218 460 1,655 94,523 6,499 123,985 (2,240) 2,213 15,510 $139,468 966 29 55 4,218 16 5,309 4.78 6.30 3.32 4.46 0.25 4.28 Savings accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Interest-bearing transaction accounts . . . . . . . . . . . . . Money market accounts . . . . . . . . . . . . . . . . . . . . . . . . Money market accounts—foreign . . . . . . . . . . . . . . . . Time deposits—customer . . . . . . . . . . . . . . . . . . . . . . Total customer deposits—interest-bearing (4) . . . . . Time deposits—non customer . . . . . . . . . . . . . . . . . . . Other foreign deposits . . . . . . . . . . . . . . . . . . . . . . . . . Total treasury deposits—interest-bearing . . . . . . . . . . 5,062 15,613 25,142 467 21,635 67,919 11 — 11 5 27 72 1 367 472 — — — 0.10 $ 0.17 0.29 0.21 1.70 0.69 4,459 14,404 26,753 601 26,236 72,453 — — — 54 — 54 Total interest-bearing deposits . . . . . . . . . . . . . 67,930 472 0.69 72,507 Federal funds purchased and securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . Other short-term borrowings . . . . . . . . . . . . . . . . . . . . Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . Total interest-bearing liabilities . . . . . . . . . . . . . . . . . . 1,801 186 11,240 81,157 Net interest spread . . . . . . . . . . . . . . . . . . . . . . (1) — 371 842 (0.06) — 3.30 1.04 2.78 1,983 331 15,489 90,310 4 32 116 1 601 754 — 1 1 755 3 1 489 1,248 3,984 14,347 21,434 1,139 32,617 73,521 122 312 434 5 40 181 3 1,045 1,274 2 1 3 73,955 1,277 2,661 4,600 18,501 99,717 8 36 663 1,984 0.09 $ 0.22 0.43 0.17 2.29 1.04 1.85 — 1.85 1.04 0.15 0.30 3.16 1.38 2.59 0.13 0.28 0.84 0.26 3.20 1.73 1.64 0.32 0.69 1.73 0.30 0.78 3.58 1.99 2.29 Customer deposits—non-interest-bearing (4) . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,741 2,471 15,350 $126,719 23,982 2,512 15,916 $132,720 20,657 2,870 16,224 $139,468 Net interest income/margin on a taxable- equivalent basis from continuing operations (3)(5) . . . . . . . . . . . . . . . . . . . . . . . . . $3,445 3.07% $3,421 2.91% $3,325 2.68% (1) Loans, net of unearned income include non-accrual loans for all periods presented. (2) Interest income includes loan fees of $50 million, $37 million and $30 million for the years ended December 31, 2011, 2010 and 2009, respectively. (3) The computation of taxable-equivalent net interest income is based on the stautory federal income tax rate of 35%, adjusted for applicable state income taxes net of the related federal tax benefit. (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 0.49%, 0.78% and 1.35% for the twelve months ended December 31, 2011, 2010 and 2009, respectively. (5) The table above does not include average assets, average liabilities, interest income or interest expense for discontinued operations (see Note 3 to the consolidated financial statements). If these assets, liabilities, and net interest income were included in the calculation, the consolidated net interest income and margin on a taxable equivalent basis would be $3,476 million and 3.05%, $3,464 million and 2.90% and $3,367 million and 2.67% for the years ended December 31, 2011, 2010, and 2009, respectively. 67 Table 4—Volume and Yield/Rate Variances for Continuing Operations Interest income on: Federal funds sold and securities purchased under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading account assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities: Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans, net of unearned income . . . . . . . . . . . . . . . . . . . . . . . . . Other interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense on: Savings accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest-bearing transaction accounts . . . . . . . . . . . . . . . . . . . . Money market accounts—domestic . . . . . . . . . . . . . . . . . . . . . Money market accounts—foreign . . . . . . . . . . . . . . . . . . . . . . Time deposits—customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total customer deposits—interest-bearing . . . . . . . . . . . . Time deposits—non customer . . . . . . . . . . . . . . . . . . . . . . . . . Other foreign deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total treasury deposits—interest-bearing . . . . . . . . . . . . . Total interest-bearing deposits . . . . . . . . . . . . . . . . . Federal funds purchased and securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest-bearing liabilities . . . . . . . . . . . . . . . . . . . . . . . . 2011 Compared to 2010 2010 Compared to 2009 Change Due to Change Due to Volume Yield/ Rate Net Volume Yield/ Rate Net (Taxable equivalent basis – in millions) $ (1) $ — (1) $ (3) (2) $ — $ (3) (14) 2 (4) $ 2 (18) 26 — (5) (258) 1 (237) 1 3 (7) — (95) (98) — — — (115) (1) (4) (257) (141) (1) 1 1 (1) — (145) (382) 156 (16) (12) (342) (4) (232) (249) (12) (4) (142) 1 (93) (28) (16) (484) (3) (408) (640) (2) (8) (103) (1) (263) (377) — (8) (37) — (139) (184) (1) — 1 1 (5) — 38 (44) (1) — (181) (234) (143) (282) (1) — (1) (1) (1) — (1) — (2) — (1) (8) (65) (2) (444) (520) (1) (1) (2) (98) (185) (283) (145) (377) (522) — — (140) (238) (4) (1) 22 (4) (1) (118) (168) (406) (2) (21) (101) (269) (3) (14) (73) (5) (35) (174) (467) (736) Increase in net interest income . . . . . . . . . . . . . . . . . . . . . . . . . $ 1 $ 23 $ 24 $ 37 $ 59 $ 96 Notes: 1. 2. 3. The change in interest not due solely to volume or yield/rate has been allocated to the volume column and yield/rate column in proportion to the relationship of the absolute dollar amounts of the change in each. The computation of taxable-equivalent net interest income is based on the statutory federal income tax rate of 35 percent, adjusted for applicable state income taxes net of the related federal tax benefit. The table above does not include average assets, average liabilities, interest income or interest expense for discontinued operations (see Note 3 to the consolidated financial statements). Net interest income and interest-rate spread are also affected by the actions taken to manage interest rate risk. As described in the “Market Risk-Interest Rate Risk” section of MD&A, Regions employs multiple tools in order to manage the risk of variability in net interest income attributable to changes in interest rates. Among these tools are interest rate derivatives. In 2011, net interest income attributable to interest rate derivatives for hedging purposes was $362 million versus $515 million in 2010. 68 The mix of interest-earning assets can also affect the interest rate spread. Regions’ primary types of interest- earning assets are loans and investment securities. Certain types of interest-earning assets have historically generated larger spreads; for example, loans typically generate larger spreads than other assets, such as securities, Federal funds sold or securities purchased under agreements to resell. The spread on loans remained depressed in 2011 due to the low interest rate environment and a high level of loans on non-accrual status. Average interest- earning assets at December 31, 2011 totaled $112.2 billion, a decrease of $5.3 billion as compared to the prior year, or 5 percent. While average earning assets declined during 2011, the mix changed somewhat, reflecting higher securities balances on average and a decline in average loans due to decreased loan demand, consumers deleveraging and run-off of investor real estate. Also affecting the interest rate spread and the net interest margin were continued elevated balances of interest-bearing deposits in other banks (included in “other interest-earning assets” in Table 3), primarily the Federal Reserve Bank, as a result of the Company’s liquidity management process. These funds generate a significantly lower spread than loans or securities. The higher levels of cash reserves negatively impacted the net interest margin by 13 basis points in 2011 and 12 basis points in 2010. In addition, elevated levels of non-performing assets negatively impacted the net interest margin by 14 basis points in 2011 compared to 17 basis points in 2010. Average loans as a percentage of average interest-earning assets were 73 percent in 2011 and 75 percent in 2010. The categories, which consist of interest-earning assets, are shown in Table 3 “Consolidated Average Daily Balances and Yield/Rate Analysis for Continuing Operations”. The proportion of average interest-earning assets to average total assets measures the effectiveness of management’s efforts to invest available funds into the most profitable interest-earning vehicles and represented 89 percent in both 2011 and 2010. This measure was consistent with the prior year as the overwhelming majority of the decline in total assets in 2011 was in interest- earning assets. Funding for Regions’ interest-earning assets comes from interest-bearing and non-interest-bearing sources. Another significant factor affecting the net interest margin is the percentage of interest-earning assets funded by interest-bearing liabilities. The percentage of average interest-earning assets funded by average interest-bearing liabilities was 72 percent in 2011 and 77 percent in 2010, also affected by the aforementioned increase in deposits in other banks. Table 4 “Volume and Yield/Rate Variances for Continuing Operations” provides additional information with which to analyze the changes in net interest income. PROVISION FOR LOAN LOSSES The provision for loan losses is used to maintain the allowance for loan losses at a level that, in management’s judgment, is appropriate to cover losses inherent in the portfolio at the balance sheet date. During 2011, the provision for loan losses was $1.5 billion and net charge-offs were $2.0 billion. This compares to a provision for loan losses of $2.9 billion and net charge-offs of $2.8 billion in 2010. Net charge-offs exceeded the provision for loan losses during 2011 primarily due to the allowance associated with the loans transferred to held for sale, as well as improving consumer credit metrics. For further discussion and analysis of the total allowance for credit losses, see the “Risk Management” section found later in this report. See also Note 6 “Allowance for Credit Losses” to the consolidated financial statements. NON-INTEREST INCOME Non-interest income from continuing operations represents fees and income derived from sources other than interest-earning assets. Table 5 “Non-Interest Income for Continuing Operations” provides a detail of the components of non-interest income from continuing operations. Non-interest income totaled $2.1 billion in 2011 compared to $2.5 billion in 2010. The decrease in non-interest income is primarily due to a decrease in securities gains and leveraged lease termination gains. Excluding these two items, non-interest income was essentially stable compared to 2010. 69 Table 5—Non-Interest Income from Continuing Operations Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital markets and investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trust department income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance commissions and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leveraged lease termination gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial credit fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net revenue (loss) from affordable housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Visa-related gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other miscellaneous income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31 2011 2010 2009 (In millions) $1,174 69 247 196 394 104 78 76 88 (72) — 135 $1,168 64 220 199 112 106 8 80 83 (69) — 172 $1,156 39 259 191 69 105 587 70 74 (53) 80 188 $2,143 $2,489 $2,765 Service Charges on Deposit Accounts Income from service charges on deposit accounts decreased less than 1 percent in 2011 and totaled $1.2 billion in both 2011 and 2010. This modest decrease was driven by policy changes related to Regulation E, as well as a decline in interchange income as a result of debit interchange price controls implemented in the fourth quarter of 2011. These factors were offset by the restructuring of checking accounts from free to fee-eligible and a higher level of customer transactions. Interchange income, which is included in service charges on deposit accounts, was impacted by the Federal Reserve’s rulemaking required by section 1075 of the Dodd-Frank Act. The Federal Reserve Board of Governors announced its final rule on debit card interchange fees mandated by the Durbin Amendment to the Dodd-Frank Act effective October 1, 2011. The final proposal included an allowable interchange fee of 21 cents per transaction plus a 5 basis points allowance for fraud mitigation expenses, which was higher than the original proposal, but below the 44 cents per transaction which was the average amount charged for debit transactions according to the Federal Reserve’s study on interchange transactions. Total revenues from debit card income at Regions were $335 million in 2011, which included one full quarter under the final rules. Based on the final ruling, the Company estimates that the reduction to annual debit interchange revenue will be approximately $180 million before any mitigation efforts. However, the Company believes it will be able to mitigate this impact over time through fee changes, introduction of new products and services and expense management. Capital Markets, Investment and Trust Department Income Total capital markets and investment income decreased 7 percent to $64 million in 2011 from $69 million in 2010. Trust department income increased 2 percent to $199 million in 2011, driven by a higher amount of fees from commissions. Trust assets under management were approximately $76.1 billion at year-end 2011 compared to approximately $76.6 billion at year-end 2010. Mortgage Income Mortgage income is generated through the origination and servicing of mortgage loans for long-term investors and sales of mortgage loans in the secondary market. Mortgage income decreased $27 million or 11 percent to $220 million in 2011. The decrease was primarily driven by lower benefit from mortgage servicing 70 rights and related derivatives which added $16 million of non-interest income in 2010 compared to a $22 million loss in 2011. See Note 7 “Servicing of Financial Assets” to the consolidated financial statements for further detail. Mortgage originations totaled $6.3 billion in 2011 as compared to $8.2 billion in 2010. Mortgage originations were higher in 2010 due to more refinancing activity. In 2010, refinancing encompassed 62 percent of mortgage originations versus 54 percent in 2011. Effective January 1, 2009, Regions made an election to prospectively change the policy for accounting for residential mortgage servicing rights from the amortization method to the fair value measurement method. Under the fair value measurement method, servicing assets are measured at fair value each period with changes in fair value recorded as a component of mortgage banking income. Regions uses various derivative instruments to mitigate the effect of changes in the fair value of its mortgage servicing rights. Beginning in the fourth quarter of 2009, the Company also began using trading assets to mitigate the impact of changes in the fair value of its mortgage servicing rights. Because changes in value of trading assets are reported in capital markets and investment income, and because earnings on these assets are reported in net interest income, the total effect of mortgage servicing rights and related hedging instruments impacts several line items in the statements of operations. See Note 7 “Servicing of Financial Assets” to the consolidated financial statements for further detail. At December 31, 2011, Regions’ servicing portfolio totaled $41.1 billion, $26.7 billion of which was serviced for third parties. At December 31, 2010, the servicing portfolio totaled $41.7 billion, $26.0 billion of which was serviced for third parties. Securities Gains, Net Regions reported net gains of $112 million from the sale of securities available for sale in 2011, as compared to net gains of $394 million in 2010. The Company’s gains for both years were due to increased sales activity within the available for sale category as part of the Company’s asset/liability management strategies. In 2011, the Company repositioned its securities portfolio and sold $7.7 billion of securities that were primarily agency available for sale securities. The proceeds were reinvested predominantly into similar securities with shorter durations. In 2010, the Company repositioned its securities portfolio and sold $9.9 billion of securities to mitigate prepayment risk and extended the duration on the investment portfolio. The proceeds from the sales in 2011 and 2010 were primarily reinvested in U.S. government agency mortgage-backed securities classified as available for sale. Refer to the “Securities” section in the “Balance Sheet Analysis” for further discussion. Leveraged Lease Termination Gains A 2008 settlement with the Internal Revenue Service negatively impacted the economics of Regions’ leveraged lease portfolio. In addition, there was a mutual desire with lessees to terminate certain leases within this portfolio. Accordingly, the Company decided to terminate certain of these leases in 2011 and 2010, resulting in gains of $8 million and $78 million, respectively. However, the 2010 gains were essentially offset by related income tax expense of $74 million, resulting in a minimal impact to net income. There was no material impact to income tax expense related to the 2011 gains. Bank-Owned Life Insurance Bank-owned life insurance income decreased 6 percent to $83 million in 2011, compared to $88 million in 2010. This decrease is primarily due to a decline in death benefits and crediting rates. Other Miscellaneous Income Other miscellaneous income increased $37 million to $172 million in 2011. The largest component of the increase was credit card income which totaled $31 million in 2011 with no impact in 2010. In June 2011, Regions purchased approximately $1.1 billion of Regions-branded credit card accounts from FIA Card Services. 71 NON-INTEREST EXPENSE The following section contains a discussion of non-interest expense from continuing operations. The largest components of non-interest expense are salaries and employee benefits, net occupancy expense and furniture and equipment expense. Non-interest expense in 2011 totaled $3.9 billion and included a goodwill impairment charge of $253 million. In 2010, non-interest expense totaled $3.9 billion and included a $75 million regulatory charge. Non-interest expense excluding the goodwill impairment and regulatory charges (non-GAAP) decreased $175 million, or 5 percent, to $3.6 billion in 2011. Table 6 “Non-Interest Expense from Continuing Operations (including Non-GAAP reconciliation)” presents major non-interest expense components, both including and excluding the regulatory charge and goodwill impairment, for the years ended December 31, 2011, 2010 and 2009. Management believes the inclusion of non-GAAP financial measures in Table 6 is useful in the evaluation of trends in non-interest expense. See the text preceding Table 2 “GAAP to Non-GAAP Reconciliation” for further discussion of non-GAAP financial measures. 72 Table 6—Non-Interest Expense from Continuing Operations (including Non-GAAP reconciliation) As Reported (GAAP) Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and equipment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Professional and legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of core deposit intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other real estate owned expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Branch consolidation and property and equipment charges . . . . . . . . . . . . . . . . Other-than-temporary impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FDIC premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on early extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other miscellaneous expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and equipment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Professional and legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of core deposit intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other real estate owned expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Branch consolidation and property and equipment charges . . . . . . . . . . . . . . . . Other-than-temporary impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FDIC premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on early extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other miscellaneous expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and equipment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Professional and legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of core deposit intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other real estate owned expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Branch consolidation and property and equipment charges . . . . . . . . . . . . . . . . Other-than-temporary impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FDIC premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on early extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other miscellaneous expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Year Ended December 31 2011 2010 2009 $1,604 388 275 175 95 162 75 2 217 — — 253 616 $3,862 (In millions) $1,640 411 277 170 107 209 — 2 220 108 75 — 640 $3,859 $1,635 422 281 167 120 175 — 75 227 — — — 683 $3,785 Regulatory Charge and Goodwill Impairment Year Ended December 31 2011 2010 2009 $ — — — — — — — — — — — 253 — $ 253 (In millions) $ — — — — — — — — — — 75 — — 75 $ $ — — — — — — — — — — — — — $ — As Adjusted (Non-GAAP) Year Ended December 31 2011 2010 2009 $1,604 388 275 175 95 162 75 2 217 — — — 616 $3,609 (In millions) $1,640 411 277 170 107 209 — 2 220 108 — — 640 $3,784 $1,635 422 281 167 120 175 — 75 227 — — — 683 $3,785 Salaries and Employee Benefits Total salaries and employee benefits decreased $36 million, or 2 percent, in 2011. The year-over-year decrease in salaries and employee benefits cost was primarily due to lower headcount and lower pension costs. At December 31, 2011, Regions had 26,813 employees compared to 27,829 at December 31, 2010. Excluding Morgan Keegan associates, there were 23,707 and 24,656 employees at the end of 2011 and 2010, respectively. Regions provides employees who meet established employment requirements with a benefits package that includes 401(k), pension, and medical, life and disability insurance plans. The pension plan has been closed to new enrollments since 2006. Regions’ 401(k) plan includes a Company match of eligible employee contributions. See Note 17 “Employee Benefit Plans” to the consolidated financial statements for further details. There are various incentive plans in place in many of Regions’ lines of business that are tied to the performance levels of employees. In general, incentives are used to reward employees for selling products and services, for productivity improvements and for achievement of corporate financial goals. These achievements are determined through a review of profitability and risk management. Regions’ long-term incentive plan provides for the granting of stock options, restricted stock, restricted stock units and performance shares. See Note 16 “Share-Based Payments” to the consolidated financial statements for further information. Net Occupancy Expense Net occupancy expense includes rents, depreciation and amortization, utilities, maintenance, insurance, taxes, and other expenses of premises occupied by Regions and its affiliates. Net occupancy expense decreased $23 million, or 6 percent, in 2011. Rent expense decreased as a result of branch consolidation that occurred in early 2010 and late 2011, as well as a result of other lease downsizing efforts. At December 31, 2011, Regions had 1,726 branches compared to 1,772 at December 31, 2010. In 2011, Regions eliminated approximately 700,000 square feet of excess facilities space. Furniture and Equipment Expense Furniture and equipment expense decreased modestly by 1 percent to $275 million in 2011 primarily driven by branch consolidations. Professional and Legal Fees Professional and legal fees are comprised of amounts related to legal, consulting and other professional fees. These fees increased $5 million to $175 million in 2011, reflecting a 3 percent increase in the level of legal expenses and credit-related legal costs in 2011. Refer to Note 23 “Commitments, Contingencies and Guarantees” to the consolidated financial statements for additional information. Amortization of Core Deposit Intangibles The premium paid for core deposits in an acquisition is considered to be an intangible asset that is amortized on an accelerated basis over its useful life. As a result, amortization of core deposit intangibles decreased 11 percent to $95 million in 2011 compared to $107 million in 2010. Other Real Estate Owned Expense Other real estate owned (“OREO”) expenses include the cost of adjusting foreclosed properties to fair value after these assets have been classified as OREO and net gains and losses on sales of properties, as well as other costs to maintain the property such as property taxes, security, and grounds maintenance. Through Regions’ efforts to sell foreclosed properties, OREO balances decreased $158 million to $296 million in 2011. This reduction in OREO balances, along with lower valuation charges, was the primary driver of the $47 million decline in OREO expense in 2011. See the “Foreclosed Properties” section later in the Balance Sheet Analysis. 74 Branch Consolidation and Property and Equipment Charges Non-interest expense in 2011 included $75 million of branch consolidation charges related to lower of cost or market adjustments on owned branch property, terminated ground leases and impairment of other equipment. The charges were driven primarily by Regions’ decision to consolidate approximately 40 branches. Regions expects to realize future net cost savings of approximately $19 million on an annual basis as a result of the consolidations. FDIC Premiums FDIC premiums decreased in 2011 by $3 million to $217 million. FDIC premiums were impacted by a new assessment rule in 2011, which revised the deposit insurance assessment system for large institutions. The new rule changed the assessment base from deposits as the basis and utilizes a risk-based approach which calculates the assessment using average consolidated assets minus average tangible equity. Implementation of the new rule was effective beginning in the second quarter of 2011. The bank regulatory agencies’ ratings, comprised of Regions Bank’s capital, asset quality, management, earnings, liquidity and sensitivity to risk, along with certain financial ratios are used in determining FDIC insurance premiums. For further information, see discussion of Deposit Insurance in the Supervision and Regulation section of Item 1 of this Form 10-K. Loss on Early Extinguishment of Debt During 2010, Regions prepaid approximately $2.0 billion of FHLB advances, realizing a $108 million pre-tax loss on early extinguishment. These extinguishments were part of the Company’s asset/liability management process. Regulatory Charge During the second quarter of 2010, the SEC, a joint state task force of state securities regulators and FINRA announced that they were commencing administrative proceedings against Morgan Keegan, Morgan Asset Management and certain of their employees for violations of federal and state securities laws and NASD rules relating to certain mutual funds previously administered by Morgan Keegan and Morgan Asset Management. Based on the status of settlement negotiations, Regions concluded that a loss on the matter was probable and reasonably estimable. Accordingly, at June 30, 2010, Regions recorded a $200 million charge representing the estimate of probable loss. Of this amount, $75 million was from continuing operations and $125 million was from discontinued operations. The charges were settled during the second quarter of 2011. Goodwill Impairment As a result of the process of selling Morgan Keegan, Regions’ 2011 results include a non-cash goodwill impairment charge of $731 million (net of $14 million income tax impact) within the investment banking/ brokerage/trust segment. Based on a relative fair value allocation, $478 million was recorded within discontinued operations and $253 million within continuing operations. The goodwill impairment charge is a non-cash item which does not have an adverse impact on regulatory capital. Refer to Note 9 in the footnotes to the consolidated financial statements for further details. Other Miscellaneous Expenses Other miscellaneous expenses include communications, postage, supplies, credit-related costs and business development services. Other miscellaneous expenses decreased $24 million to $616 million in 2011, reflecting the Company controlling discretionary costs. 75 INCOME TAXES The Company’s income tax benefit from continuing operations for 2011 was $28 million compared to a tax benefit of $376 million in 2010, resulting in an effective tax rate of (17.4) percent and 44.5 percent, respectively. The decrease in the income tax benefit was primarily a result of positive consolidated pre-tax earnings and the goodwill impairment. The Company’s effective tax rate is affected by recurring items such as affordable housing tax credits, bank- owned life insurance and tax-exempt income, which are expected to be consistent in the near term. The effective tax rate is also affected by items that may occur in any given period but are not consistent from period to period, such as the termination of certain leveraged leases. Accordingly, future period effective tax rates may not be comparable to the current period. For 2011, the Company recorded an income tax benefit from discontinued operations of $4 million. In 2011, a regulatory settlement was finalized and a portion was determined to be deductible for income tax purposes. This settlement resulted in a $27 million income tax benefit to discontinued operations. In addition, the $492 million goodwill impairment reflected in 2011 discontinued operations resulted in a $14 million income tax benefit. The 2010 regulatory charge of $125 million reflected in discontinued operations was considered to be non-deductible at the time of the accrual. At December 31, 2011, the Company reported a net deferred tax asset of $1.3 billion. Of this amount, $857 million was generated from differences between the financial statement carrying amounts and the corresponding tax bases of assets and liabilities, of which a significant portion relates to the allowance for loan losses. These net deferred tax assets have not yet reduced taxable income and therefore do not have a set expiration date. The remaining $429 million net deferred tax asset balance relates to tax carryforwards that have defined expiration dates which are typically 15 or 20 years from the date of creation. Of the $429 million, $87 million of this deferred tax asset is related to tax carryforwards that have expiration dates prior to the tax year 2024. Additional details related to tax carryforwards, including more information regarding the expiration of various categories of carryforwards, is included in Note 19 “Income Taxes” to the consolidated financial statements. Management’s determination of the realization of the net deferred tax asset is based upon an evaluation of the four possible sources of taxable income: 1) the future reversals of taxable temporary differences; 2) future taxable income exclusive of reversing temporary differences and carryforwards; 3) taxable income in prior carryback years; and 4) tax-planning strategies. In making a conclusion, management has evaluated all available positive and negative evidence impacting these sources of taxable income. The primary sources of positive and negative evidence impacting taxable income are summarized below. Positive Evidence • • • History of earnings—The Company has a strong history of generating earnings and has demonstrated positive earnings in 16 of the last 20 years. Absent the goodwill impairments during 2011 and 2008, which had limited impact on taxable net income reported on the Company’s tax returns, the Company would have generated positive earnings during these years leaving only 2009 and 2010 in loss positions. The Company did not generate any federal net operating losses or tax credit carryforwards until 2009, and in 2011 the Company utilized all federal net operating losses and a portion of the federal tax credit carryforwards. There is no history of significant tax carryforwards expiring unused. Reversals of taxable temporary differences—The Company anticipates that future reversals of taxable temporary differences, including the accretion of taxable temporary differences related to leveraged leases acquired in a prior business combination can absorb up to approximately $850 million of deferred tax assets. Creation of future taxable income—At December 31, 2011, the Company utilized all taxable income in prior carryback years. The Company has projected future taxable income that will be sufficient to absorb the remaining deferred tax assets after the reversal of future taxable temporary differences. The taxable income forecasting process utilizes the forecasted pre-tax earnings and adjusts for book-tax 76 differences that will be exempt from taxation, primarily tax-exempt interest income and bank-owned life insurance, as well as temporary book-tax differences including the allowance for loan losses. The projections relied upon for this process are consistent with those used from the Company’s financial forecasting process. • • Strong capital position—At December 31, 2011, the Company had a Tier 1 capital ratio of 13.28 percent, substantially above the 6.0 percent minimum standard to be well capitalized. Also, the Total capital ratio of 16.99 percent substantially exceeds the 10.0 percent minimum standard to be well capitalized. The Company’s Tier 1 common ratio (non-GAAP) was 8.5 percent at December 31, 2011 (see Table 2 “GAAP to Non-GAAP Reconciliation” for further details). The Board of Governors of the Federal Reserve System has proposed 5 percent as the level of Tier 1 common capital sufficient to withstand adverse economic scenarios. Ability to implement tax-planning strategies—The Company has the ability to implement tax planning strategies to maximize the realization of deferred tax assets, such as the sale of assets. As an example, at December 31, 2011, the Company’s portfolio of securities available for sale had $532 million of gross unrealized pre-tax gains which could accelerate the recognition of the associated taxable temporary differences, which management would consider being a tax planning strategy to maximize the realization of the deferred tax assets that may expire unutilized. Negative Evidence • Cumulative loss position—The Company is currently in a three-year cumulative loss position. Excluding the goodwill impairment in 2011 and a portion of the regulatory charge taken in 2010, as these items are nondeductible for income tax purposes, the cumulative continuing operations pre-tax loss position for 2009 through 2011 is $1.7 billion. The cumulative loss has resulted from the unprecedented provision for loan losses of $7.9 billion during these periods, which management believes will continue to be reduced in future periods. During 2011, the provision for loan losses decreased $1.4 billion to $1.5 billion, as compared to the provision for loan losses of $2.9 billion in 2010. Additionally, absent the goodwill impairment, Regions would have reported positive net income available to common shareholders for 2011, providing positive evidence regarding the Company’s earnings. The Company believes the positive evidence, when considered in its entirety, outweighs the negative evidence of recent pre-tax losses. See Note 1 “Summary of Significant Accounting Policies” and Note 19 “Income Taxes” to the consolidated financial statements for additional information about income taxes. BALANCE SHEET ANALYSIS At December 31, 2011, Regions reported total assets of $127.1 billion compared to $132.4 billion at the end of 2010, a decrease of approximately $5.3 billion or 4 percent. Loans, net of unearned income, declined approximately $5.3 billion, primarily related to the investor real estate segment. Goodwill declined between years as a result of the goodwill impairment recognized in the Investment/Banking/Brokerage/Trust segment related to the process of selling Morgan Keegan as further discussed in Note 9 “Intangible Assets.” Other assets also declined between years due to variations in settlements of securities sales. Offsetting these declines was an approximate $1.2 billion increase in securities available for sale. Cash and Cash Equivalents Cash and cash equivalents include cash and due from banks, interest-bearing deposits in other banks (including the Federal Reserve Bank), and Federal funds sold and securities purchased under agreements to resell (which have a life of 90 days or less). At December 31, 2011, these assets totaled $7.2 billion as compared to 77 $6.9 billion at December 31, 2010. The year-over-year increase was primarily driven by an increase in cash and due from banks slightly offset by a decrease in federal funds sold and securities purchased under agreements to resell. Trading Account Assets Trading account assets increased $150 million to $1.3 billion at December 31, 2011. The trading account assets are primarily held at Morgan Keegan. As discussed above, early in 2012, Regions entered into an agreement to sell Morgan Keegan. Also included in trading account assets are securities held in rabbi trusts related to deferred compensation plans. Trading account assets are carried at fair value with changes in fair value reflected in the consolidated statements of operations. Table 7—Trading Account Assets Trading account assets: U.S. Treasury and Federal agency securities . . . . . . . . . . . . . . . . . . Obligations of states and political subdivisions . . . . . . . . . . . . . . . . Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31 2011 2010 (In millions) $ 624 240 402 $1,266 $ 370 355 391 $1,116 Securities Regions utilizes the securities portfolio to manage liquidity, interest rate risk, and regulatory capital, as well as to take advantage of market conditions to generate a favorable return on investments without undue risk. The portfolio consists primarily of high-quality mortgage-backed and asset-backed securities. Securities represented 19 percent of total assets at December 31, 2011 compared to 18 percent at December 31, 2010. In 2011, total securities, which are almost entirely classified as available for sale, increased $1.2 billion, or 5 percent. The “Market Risk-Interest Rate Risk” section, found later in this report, further explains Regions’ interest rate risk management practices. The weighted-average yield earned on securities, less equities, was 2.91 percent in 2011 and 3.42 percent in 2010. Table 8 “Securities” illustrates the carrying values of total securities by category. Table 8—Securities U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Obligations of states and political subdivisions . . . . . . . . . . . . . . . . . . Mortgage-backed securities: Residential agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential non-agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial non-agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate and other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 December 31 2011 2010 $ $ (In millions) 102 150 36 96 21 30 22,184 16 326 321 537 815 $24,487 21,857 22 112 100 27 1,048 $23,313 In conjunction with the Company’s asset/liability management process, during 2011, Regions sold agency securities available for sale and reinvested the proceeds predominantly into similar securities with shorter durations. Additionally, during the second half of 2011, Regions purchased approximately $493 million of corporate bonds in an effort to increase diversification in the investment portfolio and reduce exposure to mortgage refinance risk through a sector that has an attractive risk and return profile. During 2011, Regions sold approximately $7.9 billion of securities and recognized approximately $112 million in net gains. Net unrealized gains and losses in the securities available for sale portfolio are included in stockholders’ equity as accumulated other comprehensive income or loss, net of tax. At December 31, 2011, securities available for sale included a net unrealized gain of $514 million, which represented the difference between the estimated fair value of these securities as of year-end and their amortized cost. The net unrealized gain represents $532 million in gross unrealized gains and $18 million in gross unrealized losses. At December 31, 2010, securities available for sale included a net unrealized gain of $120 million, comprised of $283 million in gross unrealized gains and $163 million in gross unrealized losses. The Company reviews its securities portfolio on a regular basis to determine if there are any conditions indicating that a security has other-than-temporary impairment. Factors considered in this determination include the length of time and the extent to which the market value has been below cost, the credit standing of the issuer, Regions’ intent to sell and whether it is more likely than not that the Company will have to sell the security before its market value recovers. During 2011, Regions recognized in earnings approximately $2 million of securities impairments, related to equity securities. During 2010, Regions recognized in earnings approximately $2 million of securities impairments, related to equity and other debt securities. See Note 4 “Securities” to the consolidated financial statements for further details. Maturity Analysis—The average life of the securities portfolio (excluding equities) at December 31, 2011 was estimated to be 3.9 years, with a duration of approximately 2.1 years. These metrics compare with an estimated average life of 6.6 years, with a duration of approximately 3.4 years for the portfolio at December 31, 2010. Table 9 “Relative Contractual Maturities and Weighted-Average Yields for Securities” provides additional details. Table 9—Relative Contractual Maturities and Weighted-Average Yields for Securities Securities Maturing as of December 31, 2011 Within One Year After One But Within Five Years After Five But Within Ten Years After Ten Years Total (Dollars in millions) Securities: U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . . Obligations of states and political subdivisions . . . . . . . . . . Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . Residential agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential non-agency . . . . . . . . . . . . . . . . . . . . . . . . Commercial agency . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial non-agency . . . . . . . . . . . . . . . . . . . . . . . Corporate and other debt securities . . . . . . . . . . . . . . . . . . . $ 59 3 2 — — — 3 6 $ 39 139 6 70 — — 35 123 $ 3 5 6 1,414 — 57 46 309 $ 1 3 22 $ 102 150 36 20,697 16 269 240 99 22,184 16 326 321 537 $ 73 $ 412 $1,840 $21,347 $23,672 Weighted-average yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.40% 2.89% 2.99% 2.91% 2.91% Notes: 1. 2. The weighted-average yields are calculated on the basis of the yield to maturity based on the book value of each security. Weighted-average yields on tax-exempt obligations have been computed on a fully-taxable equivalent basis using a tax rate of 35 percent. Taxable-equivalent adjustments for the calculation of yields amounted to zero as of December 31, 2011. Yields on tax-exempt obligations have not been adjusted for the non-deductible portion of interest expense used to finance the purchase of tax-exempt obligations. Federal Reserve Bank stock, Federal Home Loan Bank stock, and equity stock of other corporations held by Regions are not included in the table above. 79 Portfolio Quality—Regions’ investment policy emphasizes credit quality and liquidity. Securities rated in the highest category by nationally recognized rating agencies and securities backed by the U.S. Government and government sponsored agencies, both on a direct and indirect basis, represented approximately 97 percent of the investment portfolio at December 31, 2011. All other securities rated below AAA, not backed by the U.S. Government or government sponsored agencies, or which are not rated represented less than 3 percent of total securities at year-end 2011. Loans Held for Sale At December 31, 2011, loans held for sale totaled $1.2 billion, consisting of $844 million of residential real estate mortgage loans and $328 million of non-performing investor real estate loans. At December 31, 2010, loans held for sale totaled $1.5 billion, consisting of $1.2 billion of residential real estate mortgage loans and $304 million of non-performing investor real estate loans. The level of residential real estate mortgage loans held for sale fluctuates depending on the timing of origination and sale to third parties. Loans GENERAL Average loans, net of unearned income, represented 72 percent of average interest-earning assets from continuing operations for the year ended December 31, 2011, compared to 74 percent for the year ended December 31, 2010. Lending at Regions is generally organized along three portfolio segments: commercial (including commercial and industrial, and owner occupied commercial real estate mortgage and construction loans), investor real estate loans (commercial real estate mortgage and construction loans) and consumer loans (residential first mortgage, home equity, indirect, consumer credit card and other consumer loans). Regions manages loan growth with a focus on risk management and risk-adjusted return on capital. Strategic decisions to reduce the concentration in investor real estate, sales of residential mortgage loans, and lower demand for home equity products were the primary contributors to the decrease. The decrease was partially offset by increases in commercial and industrial loans and indirect automobile lending as well as the purchase of Regions-branded credit card loans during the second quarter of 2011. Table 10 illustrates a year-over-year comparison of loans by portfolio segment and class and Table 11 provides information on selected loan maturities. 80 Table 10—Loan Portfolio 2011 2010 2009 2008 (In millions, net of unearned income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial and industrial Commercial real estate mortgage—owner occupied . . . . . . . . . Commercial real estate construction—owner occupied . . . . . . . Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial investor real estate mortgage . . . . . . . . . . . . . . . . . Commercial investor real estate construction . . . . . . . . . . . . . . . Total investor real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential first mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indirect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,522 11,166 337 36,025 9,702 1,025 10,727 13,784 13,021 1,848 987 1,202 30,842 $22,540 12,046 470 $21,547 12,054 751 $23,596 11,722 1,605 35,056 13,621 2,287 15,908 14,898 14,226 1,592 — 1,184 34,352 16,109 5,591 21,700 15,632 15,381 2,452 — 1,157 36,923 14,486 9,029 23,515 15,839 16,130 3,854 — 1,158 31,900 34,622 36,981 $77,594 $82,864 $90,674 $97,419 Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate construction (1) Residential first mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indirect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 (In millions, net of unearned income) $20,907 23,107 13,302 16,960 14,962 3,938 2,203 $95,379 (1) Breakout of commercial real estate mortgage and construction between owner occupied and investor categories is not available for periods prior to 2008. 81 Table 11—Selected Loan Maturities Loans Maturing as of December 31, 2011 (2) Commercial and industrial (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate mortgage—owner-occupied . . . . . . . . . . . . . . . Commercial real estate construction—owner-occupied . . . . . . . . . . . . . $ 5,511 1,965 39 Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial investor real estate mortgage . . . . . . . . . . . . . . . . . . . . . . . Commercial investor real estate construction . . . . . . . . . . . . . . . . . . . . . Total investor real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,515 4,811 605 5,416 $14,613 5,913 126 20,652 4,253 396 4,649 Within One Year After One But Within Five Years After Five Years (In millions) Total $24,393 11,166 337 35,896 9,702 1,025 $4,269 3,288 172 7,729 638 24 662 10,727 $12,931 $25,301 $8,391 $46,623 Due after one year but within five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due after five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Predetermined Rate Variable Rate (In millions) $5,894 4,087 $9,981 $19,407 4,304 $23,711 (1) Excludes $129 million of small business credit card accounts. (2) Table 11 excludes residential first mortgage, home equity, indirect and other consumer loans. The following sections describe the composition of the portfolio segments and classes in Table 10 and explain variations in balances from the 2010 year-end. See Note 5 “Loans” and Note 6 “Allowance for Credit Losses” to the consolidated financial statements for additional discussion. 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 also includes owner-occupied commercial real estate loans to operating businesses, which are loans for long-term financing of land and buildings, and are repaid by cash flow generated by business operations. Owner-occupied construction loans are made to commercial businesses for the development of land or construction of a building where the repayment is derived from revenues generated from the business of the borrower. During 2011, total commercial loan balances increased $969 million, or 3 percent, driven by growth experienced in specialized industry groups. Investor Real Estate—Loans for real estate development are repaid through cash flow related to the operation, sale or refinance of the property. This portfolio segment includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of real estate or income generated from the real estate collateral. A portion of Regions’ investor real estate portfolio segment is comprised of loans secured by residential product types (land, single-family and condominium loans) within Regions’ markets. Additionally, this category includes loans made to finance income-producing properties such as apartment buildings, office and industrial buildings, and retail shopping centers. The investor real estate loan segment decreased $5.2 billion from 2010 balances primarily due to strategic decisions to reduce the concentration in investor real estate in response to credit risk and economic pressure. Residential First Mortgage—Residential first mortgage loans represent loans to consumers to finance a residence. These loans are typically financed over a 15 to 30 year term and, in most cases, are extended to borrowers to finance their primary residence. These loans experienced a $1.1 billion decline to $13.8 billion in 82 2011, primarily due to lower mortgage origination volume reflecting decreased refinance activity in 2011 as compared to 2010. Mortgage originations totaled $6.3 billion in 2011 as compared to $8.2 billion in 2010. Refer to Note 6 “Allowance for Credit Losses” to the consolidated financial statements for additional discussion. Home Equity—Home equity lending includes both home equity loans and lines of credit. This type of lending, which is secured by a first or second mortgage on the borrower’s residence, allows customers to borrow against the equity in their home. Substantially all of this portfolio was originated through Regions’ branch network. During 2011, home equity balances decreased $1.2 billion to $13.0 billion, driven by the continued general decline in demand and lower property valuations across the Company’s operating footprint. During 2011, credit quality within the home equity portfolio continued to reflect pressure, but total charge-offs during 2011 decreased as compared to 2010. However, losses in Florida based-credits where the collateral is a second lien remained at elevated levels, as unemployment levels remain high and property valuations in certain markets have continued to experience ongoing deterioration. More information related to these developments is included in the “Home Equity” discussion below. Indirect—Indirect lending, which is lending initiated through third-party business partners, is largely comprised of loans made through automotive dealerships. This portfolio class increased $256 million, or 16 percent in 2011, reflecting growth from the late 2010 re-entry into the indirect auto lending business. Consumer Credit Card—During the second quarter of 2011, Regions completed the purchase of approximately $1.0 billion of Regions-branded consumer credit card accounts from FIA Card Services. The products are primarily open-ended variable interest rate consumer credit card loans. Other Consumer—Other consumer loans include direct consumer installment loans, overdrafts and other revolving credit, and educational loans. Other consumer loans totaled $1.2 billion at December 31, 2011, relatively unchanged from the prior year. CREDIT QUALITY Weak economic conditions, including declining property values and high levels of unemployment, impacted the credit quality of Regions’ loan portfolio. Investor real estate loans and home equity products (particularly Florida second lien—see Table 14) carry a higher risk of non-collection than many other loans. The following chart presents details of Regions’ $10.7 billion investor real estate portfolio as of December 31, 2011 (dollars in billions): Land $0.9 B / 8% Single Family $0.8 B / 8% Industrial $0.8 B / 8% Hotel $0.7 B / 6% Other $0.6 B / 6% Condo $0.2 B / 1% Office $1.9 B / 18% Retail $2.2 B / 21% Multi-Family $2.6 B / 24% LAND, SINGLE-FAMILY AND CONDOMINIUM Credit quality of the investor real estate portfolio segment is sensitive to risks associated with construction loans such as cost overruns, project completion risk, general contractor credit risk, environmental and other hazard risks, and market risks associated with the sale or rental of completed properties. Certain components of the investor real estate portfolio segment carry a higher risk of non-collection. While losses within these loan types were influenced by conditions described above, the most significant drivers of losses were the continued decline in demand for residential real estate and in the value of property. The land, single-family and condominium components of the investor real estate portfolio segment are particularly affected by these risks and conditions. 83 The following table presents credit metrics for land, single-family and condominium loans: Table 12—Land, Single-family and Condominium Land Loan balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accruing loans 90 days past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-accruing loans* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-accruing %* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Single-family Loan balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accruing loans 90 days past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-accruing loans* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-accruing %* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Condominium Loan balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accruing loans 90 days past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-accruing loans* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-accruing %* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *Excludes non-accruing loans held for sale. December 31 2011 2010 (Dollars in millions, net of unearned income) $ 857 1 203 23.7% $ 816 2 133 16.3% $ 151 1 36 23.8% $1,640 1 476 29.0% $1,236 3 290 23.5% $ 308 — 92 29.9% Regions has reduced exposures in these product types through pro-active workouts, appropriate charge-offs, and asset dispositions. MULTI-FAMILY AND RETAIL In recent years, loans within the multi-family and retail components of the investor real estate portfolio segment experienced increased pressure. Continued weak economic conditions impacted demand for products and services in these sectors. Lower demand impacted cash flows generated by these properties, leading to a higher rate of non-collection for these types of loans. The following table presents credit metrics for multi-family and retail loans: Table 13 —Multi-family and Retail December 31 2011 2010 (Dollars in millions, net of unearned income) Multi-family Loan balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accruing loans 90 days past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-accruing loans* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-accruing %* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,643 7 131 5.0% $4,241 1 239 5.6% Retail Loan balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accruing loans 90 days past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-accruing loans* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-accruing %* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,223 1 151 6.8% $3,099 — 177 5.7% * Excludes non-accruing loans held for sale. 84 Strategic reductions in investor real estate exposures as discussed above, related to land, single-family and condominium loans also drove the year-over-year decreases in multi-family and retail loans. Asset dispositions as referred to under the discussion of land, single-family and condominium, as well as multi-family and retail, may occur in several forms. Typical transactions are instances where a third party guarantor pays off a note at a discounted price or an actual sale of the note. Regions sells to strategic buyers (e.g., local developers or the note guarantor) interested in the underlying collateral who may be willing to pay more for a note or rights to collateral backing a note than other market participants. Regions has also sold loans to financial buyers such as distressed debt funds. In addition to note sales, Regions may also allow the borrower to sell the underlying collateral, apply the proceeds to the note, and charge-off the remaining balance. Regions does not sell loans, foreclosed properties or other problem assets to structured entities or other entities where Regions has an ownership interest. HOME EQUITY The home equity portfolio totaled $13.0 billion at December 31, 2011 as compared to $14.2 billion at December 31, 2010. Substantially all of this portfolio was originated through Regions’ branch network. Losses in this portfolio generally track overall economic conditions. The main source of economic stress has been in Florida, where residential property values have declined significantly while unemployment rates remain high. Losses in Florida where Regions is in a second lien position are higher than first lien losses. The following tables provide details related to the home equity portfolio: Table 14—Selected Home Equity Portfolio Information Florida All Other States Total 1st Lien 2nd Lien Total 1st Lien 2nd Lien Total 1st Lien 2nd Lien Total Year Ended December 31, 2011 Balance . . . . . . . . . . . . . . Net Charge-offs . . . . . . . . . . . Net Charge-off % (1) Balance . . . . . . . . . . . . . . Net Charge-offs . . . . . . . Net Charge-off % (1) . . . . $1,973 45 $2,786 177 $4,759 222 (Dollars in millions) $4,350 77 $8,262 107 $3,912 30 $5,885 75 $7,136 254 2.21% 5.96% 4.44% 0.75% 1.67% 1.24% 1.24% 3.35% $13,021 329 2.41% Florida All Other States Total 1st Lien 2nd Lien Total 1st Lien 2nd Lien Total 1st Lien 2nd Lien Total Year Ended December 31, 2010 $2,074 56 $3,167 237 $5,241 293 (Dollars in millions) $4,846 87 $8,985 121 $4,139 34 $6,213 90 $8,013 324 2.66% 7.12% 5.38% 0.80% 1.71% 1.30% 1.42% 3.85% $14,226 414 2.80% (1) Net charge-off percentages are calculated on an annualized basis as a percent of average balances. Net charge-offs were an annualized 2.41 percent of home equity loans for the year ended December 31, 2011 compared to an annualized 2.80 percent for the year ended December 31, 2010. Losses in Florida-based credits remained at elevated levels, but the related net charge-off percentage did decrease to 4.44 percent for the year ended December 31, 2011 from 5.38 percent for the year ended December 31, 2010. Home equity losses have decreased during 2011 due to improvement in unemployment rates which, although high, are lower than prior levels. Of the $13.0 billion home equity portfolio at December 31, 2011, approximately $11.6 billion were home equity lines of credit and $1.4 billion were closed-end home equity loans (primarily originated as amortizing loans). Beginning in May 2009, new home equity lines of credit have a 10 year draw period and a 10 year 85 repayment period. Previously, the home equity lines of credit had a 20 year term with a balloon payment upon maturity or a 5 year draw period with a balloon payment upon maturity. The term “balloon payment” means there are no principal payments required until the balloon payment is due for interest-only lines of credit. As of December 31, 2011, none of Regions’ home equity lines of credit have converted to mandatory amortization under the contractual terms. The vast majority of home equity lines of credit will convert to amortizing status after fiscal year 2020. Of the $11.6 billion of home equity lines of credit as of December 31, 2011, approximately 90 percent require monthly interest-only payments while the remaining approximately 10 percent require a payment equal to 1.5 percent of the outstanding balance, which would include some principal repayment. As of December 31, 2011, approximately 30 percent of borrowers were only paying the minimum amount due on the home equity line. In addition, approximately 54 percent of the home equity lines of credit balances have the option to amortize either all or a portion of their balance. As of December 31, 2011, approximately $537 million of the home equity lines of credit balances have elected this option. Regions’ home equity loans have higher default and delinquency rates than home equity lines of credit, which is expected at origination of the loans, due to more stringent underwriting guidelines for a line of credit versus a loan reflecting the nature of the credit being extended. Therefore, home equity loans secured with a second lien are expected to and do have higher delinquency and loss rates than home equity lines of credit with a second lien. In the current environment, second liens in areas experiencing declines in home prices, such as Florida, perform similar to an unsecured portfolio. Regions is unable to track payment status on first liens held by another institution, including payment status related to loan modifications. When Regions’ second lien position becomes delinquent, an attempt is made to contact the first lien holder and inquire as to the payment status of the first lien. However, Regions does not continuously monitor the payment status of the first lien position. Short sale offers and settlement agreements are often received by the home equity junior lien holders well before the loan balance reaches the delinquency threshold for charge-off consideration, potentially resulting in a full balance payoff/charge-off. OTHER CONSUMER CREDIT QUALITY DATA The Company calculates an estimate of the current value of property secured as collateral for both home equity and residential first mortgage lending products (“current LTV”). The estimate is based on home price indices compiled by the Federal Housing Finance Agency (“FHFA”). The FHFA data indicates trends for Metropolitan Statistical Areas (“MSA”). Regions uses the FHFA valuation trends from the MSA’s 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 mortgage and home equity classes of the consumer portfolio segment. Current LTV data for the remaining loans in the portfolio is not available, primarily because some of the loans are serviced by others. Data may also not be available due to mergers and systems integrations. The amounts in the table represent the entire loan balance. The balances in the “Above 100%” category have increased between December 31, 2010 and 2011 as a result of continued declines in residential real estate values. 86 Table 15—Estimated Current Loan to Value Ranges Estimated current loan to value: Above 100% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80% - 100% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Below 80% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Data not available . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2011 December 31, 2010 Residential First Mortgage Home Equity Residential First Mortgage Home Equity (In millions) $ 1,854 2,951 8,483 496 $13,784 $ 2,157 2,568 7,180 1,116 $13,021 $ 1,515 2,746 10,044 593 $14,898 $ 1,839 2,775 8,261 1,351 $14,226 Regions qualitatively considers factors such as periodic updates of FICO scores, unemployment, home prices, and geography as credit quality indicators for consumer loans. FICO scores are obtained at origination as part of Regions’ formal underwriting process. Refreshed FICO scores are obtained by the Company quarterly for all revolving accounts and home equity lines of credit and semi-annually for all other consumer loans. Regions considers FICO scores less than 620 to be indicative of higher credit risk and obtains additional collateral in most of these instances. The following table presents estimated current FICO score data for components of classes of the consumer portfolio segment. Current FICO data is not available for the remaining loans in the portfolio for various reasons; for example, if customers do not use sufficient credit, an updated score may not be available. For purposes of the table above, 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. Residential first mortgage and home equity balances with FICO scores below 620 improved from approximately 9.8 percent at December 31, 2010 to approximately 8.7 percent at December 31, 2011. Table 16—Estimated Current FICO Score Ranges Below 620 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 620 - 680 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 681-720 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Above 720 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Data not available . . . . . . . . . . . . . . . . . . . . . . . . . Below 620 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 620 - 680 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 681-720 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Above 720 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Data not available . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2011 Residential First Mortgage Home Equity Indirect Consumer Credit Card Other Consumer $ 1,449 1,286 1,557 8,441 1,051 $13,784 $ (In millions) $ 191 281 274 858 244 873 1,157 1,559 8,576 856 $13,021 $1,848 December 31, 2010 $ 56 129 236 561 5 $987 $ 106 142 162 383 409 $1,202 Residential First Mortgage Home Equity Indirect Consumer Credit Card Other Consumer (In millions) $ 191 198 197 775 231 $ 1,115 1,242 1,687 9,368 814 $14,226 $1,592 $— — — — — $— $ 128 145 162 406 343 $1,184 $ 1,751 1,518 1,822 6,925 2,882 $14,898 87 Allowance for Credit Losses The allowance for credit losses represents management’s estimate of credit losses inherent in the portfolio. The allowance for credit losses consists of two components: the allowance for loan losses and the reserve for unfunded credit commitments. Management’s assessment of the appropriateness of the allowance for credit losses is based on a combination of both these components. At December 31, 2011, the allowance for credit losses totaled $2.8 billion or 3.64 percent of loans, net of unearned income, compared to $3.3 billion or 3.93 percent at year-end 2010. See Note 6 to the consolidated financial statements and the “Credit Risk” section found later in this report for a detailed discussion of the allowance. 88 Activity in the allowance for credit losses is summarized as follows: Table 17—Allowance for Credit Losses 2011 2010 2009 2008 (In millions) Allowance for loan losses at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,185 $ 3,114 $ 1,826 $ 1,321 Loans charged-off: Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate mortgage—owner-occupied . . . . . . . . . . . . . . . . . . . . Commercial real estate construction—owner-occupied . . . . . . . . . . . . . . . . . Commercial investor real estate mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial investor real estate construction . . . . . . . . . . . . . . . . . . . . . . . . . Residential first mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indirect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other consumer Recoveries of loans previously charged-off: Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate mortgage—owner-occupied . . . . . . . . . . . . . . . . . . . . Commercial real estate construction—owner-occupied . . . . . . . . . . . . . . . . . Commercial investor real estate mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial investor real estate construction . . . . . . . . . . . . . . . . . . . . . . . . . Residential first mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indirect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other consumer Net charge-offs: 294 248 8 685 195 220 353 23 13 68 2,107 36 14 — 27 6 3 25 10 16 137 429 225 25 879 565 240 432 34 — 83 2,912 33 11 1 14 10 2 18 15 16 120 384 89 19 590 488 206 442 68 — 83 2,369 28 6 1 8 4 4 27 21 17 116 235 60 12 328 556 83 243 56 — 66 1,639 26 5 2 4 3 2 17 15 18 92 Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate mortgage—owner-occupied . . . . . . . . . . . . . . . . . . . . Commercial real estate construction—owner-occupied . . . . . . . . . . . . . . . . . Commercial investor real estate mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial investor real estate construction . . . . . . . . . . . . . . . . . . . . . . . . . Residential first mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indirect Consumer credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other consumer 209 55 10 324 553 81 226 41 — 48 1,547 Allowance allocated to sold loans and loans transferred to loans held for sale . . . . (5) 2,057 Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for loan losses at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,745 $ 3,185 $ 3,114 $ 1,826 58 Reserve for unfunded credit commitments at January 1 . . . . . . . . . . . . . . . . . . . . . $ Provision (credit) for unfunded credit commitments . . . . . . . . . . . . . . . . . . . . 16 74 Reserve for unfunded credit commitments at December 31 . . . . . . . . . . . . . . . . . . $ Allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,823 $ 3,256 $ 3,188 $ 1,900 258 234 8 658 189 217 328 13 13 52 1,970 — 1,530 396 214 24 865 555 238 414 19 — 67 2,792 — 2,863 356 83 18 582 484 202 415 47 — 66 2,253 — 3,541 74 $ — 74 $ 71 $ 7 78 $ 74 $ (3) 71 $ Loans, net of unearned income, outstanding at end of period Average loans, net of unearned income outstanding for the period Ratios: Allowance for loan losses at end of period to loans, net of unearned $77,594 $82,864 $90,674 $97,419 $80,673 $86,660 $94,523 $97,601 income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.54 % 3.84 % 3.43 % 1.87 % Allowance for loan losses at end of period to non-performing loans, excluding loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net charge-offs as percentage of: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average loans, net of unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.16x 1.01x 0.89x 1.74x 2.44% 3.22% 2.38% 1.59% 128.8 97.5 63.6 75.2 89 Allowance for loan losses at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans charged-off: Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential first mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indirect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other consumer Recoveries of loans previously charged-off: Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential first mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indirect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other consumer Net charge-offs: Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential first mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indirect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other consumer Allowance allocated to sold loans and loans transferred to loans held for sale . . . . . . . . . . . . . . . . . . . Provision for loan losses from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 (In millions) $ 1,056 103 39 33 20 54 36 83 368 30 9 2 1 13 16 26 97 73 30 31 19 41 20 57 271 (19) 555 Allowance for loan losses at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,321 Reserve for unfunded credit commitments at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for unfunded credit commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve for unfunded credit commitments at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 52 6 58 Allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,379 Loans, net of unearned income, outstanding at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average loans, net of unearned income outstanding for the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ratios: $95,379 $94,372 Allowance for loan losses at end of period to loans, net of unearned income . . . . . . . . . . . . . . . . Allowance for loan losses at end of period to non-performing loans, excluding loans held for 1.39% sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.78x Net charge-offs as percentage of: Average loans, net of unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.29% 48.8% (1) Breakout of commercial real estate mortgage and construction between owner occupied and investor categories is not available for periods prior to 2008. 90 Based on current expectations for the economy, management anticipates that net loan charge-offs will decrease in 2012, but continue at an elevated level for the near future. Economic trends such as real estate valuations, interest rates and unemployment will impact the future levels of net charge-offs and provision for loan losses. Regions recorded an allowance for loan losses and related premium of approximately $84 million related to its purchase of credit card accounts during the second quarter of 2011. In the fourth quarter of 2011, Regions reclassified the $84 million allowance and premium as an adjustment to the basis of the loans. The impact of these reclassification entries was not material to the consolidated financial statements. Table 18—Allocation of the Allowance for Loan Losses 2011 2010 2009 2008 Allocation Amount % of Total Allocation Amount % of Total Allocation Amount % of Total Amount Allocation % of Total $ 586 21.3% $ 641 (Dollars in millions) 20.1% $ 638 20.5% $ 466 25.5% 427 15.6 395 12.4 328 10.5 . . . . . . . Commercial and industrial Commercial real estate mortgage— owner-occupied . . . . . . . . . . . . . . Commercial real estate 172 48 686 9.4 2.6 37.5 construction—owner-occupied . . 17 Total commercial . . . . . . . . . . 1,030 0.6 37.5 19 1,055 0.6 33.1 37 1,003 1.2 32.2 Commercial investor real estate mortgage . . . . . . . . . . . . . . . . . . . 784 28.6 1,030 32.3 929 29.8 403 22.1 Commercial investor real estate construction . . . . . . . . . . . . . . . . . Total investor real estate . . . . . Residential first mortgage . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . Indirect . . . . . . . . . . . . . . . . . . . . . . Consumer credit card . . . . . . . . . . . Other consumer . . . . . . . . . . . . . . . . 207 991 282 356 17 37 32 7.5 36.1 10.3 13.0 0.6 1.3 1.2 340 1,370 295 414 17 — 34 10.7 43.0 9.3 13.0 0.5 — 1.1 536 1,465 213 374 26 — 33 17.2 47.0 6.9 12.0 0.8 — 1.1 369 772 87 235 28 — 18 20.2 42.3 4.8 12.9 1.5 — 1.0 $2,745 100.0% $3,185 100.0% $3,114 100.0% $1,826 100.0% . . . . . . . Commercial and industrial . . . . . . . . Commercial real estate (1) . . . . . . . . . . . . . . . . Construction (1) Residential first mortgage . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . Indirect . . . . . . . . . . . . . . . . . . . . . . Other consumer . . . . . . . . . . . . . . . . 2007 Allocation Amount % of Total (Dollars in millions) $ 295 411 348 89 95 52 31 22.3% 31.1 26.4 6.7 7.2 3.9 2.4 $1,321 100.0% (1) Breakout of commercial real estate mortgage and construction between owner-occupied and investor categories is not available for periods prior to 2008. 91 TROUBLED DEBT RESTRUCTURINGS Residential first mortgage, home equity and other consumer TDRs are consumer loans modified under the Customer Assistance Program (“CAP”). Commercial and investor real estate loan modifications are not the result of a formal program, but represent situations where modification was offered as a workout alternative. As a result of clarified accounting guidance that was effective in the third quarter of 2011, renewals of classified commercial and investor real estate loans are considered to be TDRs, even if no reduction in interest rate is offered, because the existing terms are considered to be below market. Refer to Note 6 “Allowance For Credit Losses” to the consolidated financial statements for detailed information related to identification of TDRs, including the impact of new accounting literature adopted during 2011, loans modified in a TDR during the period and the financial impact of those modifications, and loans which defaulted during the period which were modified in a TDR during the previous twelve months. The following table summarizes TDRs: Table 19—Troubled Debt Restructurings Accruing: Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investor real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential first mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-accrual status or 90 days past due: Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investor real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential first mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2011 December 31, 2010 Loan Balance Allowance for Credit Losses Loan Balance Allowance for Credit Losses (In millions) $ 492 995 900 407 56 2,850 353 473 210 33 1,069 $3,919 $ 89 254 132 57 1 533 100 146 31 5 282 $ 77 192 813 335 66 $ 5 4 97 42 1 1,483 149 105 198 240 30 573 23 20 28 4 75 $815 $2,056 $224 Notes: (1) All loans listed in the table above are considered impaired under applicable accounting literature. (2) Net charge-offs on commercial TDRs were approximately $46 million and $72 million for the years ended December 31, 2011 and 2010, respectively. Net charge-offs on investor real estate TDRs were approximately $44 million and $63 million for the years ended December 31, 2011 and 2010, respectively. Net charge-offs on residential first mortgage TDRs were approximately $103 million and $109 million for the years ended December 31, 2011 and 2010, respectively. Net charge-offs on home equity TDRs were approximately $41 million for the years endeds December 31, 2011 and 2010. Net charge-offs on other consumer TDRs were approximately $6 million and $7 million for the years ended December 31, 2011 and 2010, respectively. 92 Non-Performing Assets Non-performing assets consist of loans on non-accrual status and foreclosed properties and are summarized as follows: Table 20—Non-Performing Assets Non-performing loans: Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate mortgage—owner-occupied . . . . . . . . . . . . . . . Commercial real estate construction—owner-occupied . . . . . . . . . . . . . Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial investor real estate mortgage . . . . . . . . . . . . . . . . . . . . . . . Commercial investor real estate construction . . . . . . . . . . . . . . . . . . . . . Total investor real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential first mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-performing loans, excluding loans held for sale . . . . . . . . . . . . . . . Non-performing loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-performing loans (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreclosed properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 2010 2009 2008 (Dollars in millions) $ 457 590 25 1,072 734 180 914 250 136 2,372 328 2,700 296 $ 467 606 29 $ 427 560 50 $ 176 157 26 1,102 1,265 452 1,717 285 56 3,160 304 3,464 454 1,037 1,203 1,067 2,270 180 1 3,488 317 3,805 607 359 292 273 565 125 3 1,052 423 1,475 243 Total non-performing assets (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,996 $3,918 $4,412 $1,718 Accruing loans 90 days past due: Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate mortgage—owner-occupied . . . . . . . . . . . . . . . Commercial real estate construction—owner-occupied . . . . . . . . . . . . . $ Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial investor real estate mortgage . . . . . . . . . . . . . . . . . . . . . . . Commercial investor real estate construction . . . . . . . . . . . . . . . . . . . . . Total investor real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential first mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. Indirect Consumer credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 28 9 — 37 13 — 13 284 93 2 14 4 $ 9 6 1 16 5 1 6 359 198 2 — 4 $ 24 16 2 42 22 8 30 361 241 6 — 8 $ 14 9 3 26 12 12 24 275 214 8 — 7 Restructured loans not included in the categories above . . . . . . . . . . . . . . . . Non-performing loans (1) to loans and non-performing loans held for $ 447 $ 585 $ 688 $ 554 $2,850 $1,483 $1,608 $ 455 sale (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.47% 4.17% 4.18% 1.51% Non-performing assets (1) to loans, foreclosed properties and non-performing loans held for sale (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.83% 4.69% 4.82% 1.75% (1) Exclusive of accruing loans 90 days past due. (2) Beginning in 2011, non-performing loans and assets ratios include non-performing loans held for sale in the denominator, in addition to portfolio loans and foreclosed properties. Prior years have been revised to conform to current period presentation. 93 Non-performing loans: Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential first mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-performing loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreclosed properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 (In millions) $ 92 263 310 72 7 744 120 Total non-performing assets (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 864 Non-performing loans (1) to loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-performing assets (1) to loans, and foreclosed properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.78% 0.90% Accruing loans 90 days past due: Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential first mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indirect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other consumer $ 12 12 19 155 147 6 6 $ 357 (1) Exclusive of accruing loans 90 days past due. (2) Breakout of commercial real estate mortgage and construction between owner occupied and investor categories not available for periods prior to 2008. Non-performing assets totaled $3.0 billion at December 31, 2011, compared to $3.9 billion at December 31, 2010. Foreclosed properties, a subset of non-performing assets, totaled $296 million and $454 million at December 31, 2011 and December 31, 2010, respectively. The decrease in non-performing assets and foreclosed properties during 2011 reflects the Company’s efforts to work through problem assets and reduce the riskiest exposures. Based on current expectations for the economy, management anticipates non-performing assets to decrease in 2012, but remain elevated as compared to historical levels. Economic trends such as real estate valuations, interest rates and unemployment, as well as the level of disposition activity, will impact the future level of non-performing assets. Loans past due 90 days or more and still accruing were $447 million at December 31, 2011, a decrease from $585 million at December 31, 2010. At December 31, 2011, Regions had approximately $500-$600 million of potential problem commercial and investor real estate loans that were not included in non-accrual loans, but for which management had concerns as to the ability of such borrowers to comply with their present loan repayment terms. This is a likely estimate of the amount of loans that may migrate to non-accrual status in the next quarter. In order to arrive at the estimate of potential problem loans, personnel from geographic regions forecast certain larger dollar loans that may potentially be downgraded to non-accrual at a future time, depending on the occurrence of future events. These personnel consider a variety of factors, including the borrower’s capacity and willingness to meet the contractual repayment terms, make principal curtailments or provide additional collateral 94 when necessary, and provide current and complete financial information including global cash flows, contingent liabilities and sources of liquidity. A probability weighting is assigned to the listing of loans due to the inherent level of uncertainty related to potential actions that a borrower or guarantor may take to prevent the loan from reaching problem status. Regions assigns the probability weighting based on an assessment of the likelihood that the necessary actions required to prevent problem loan status will occur. Additionally, for other loans (for example, smaller dollar loans), a factor based on trends and experience is applied to determine the estimate of potential future downgrades. Because of the inherent uncertainty in forecasting future events, the estimate of potential problem loans ultimately represents the estimated aggregate dollar amounts of loans as opposed to an individual listing of loans. The majority of the loans on which the potential problem loan estimate is based are classified as substandard accrual. Detailed disclosures for substandard accrual loans (as well as other credit quality metrics) are included in Note 6 “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 for the year ended December 31, 2011: Table 21—Analysis of Non-Accrual Loans Non-Accrual Loans, Excluding Loans Held for Sale Year Ended December 31, 2011 Commercial Real Estate Consumer (1) Total Investor (In millions) Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net payments/other activity . . . . . . . . . . . . . . . . . . . . . . . . . Return to accrual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Charge-offs on non-accrual loans (2) . . . . . . . . . . . . . . . . . . . Transfers to held for sale (3) . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers to foreclosed properties . . . . . . . . . . . . . . . . . . . . . Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,102 1,196 (376) (100) (531) (117) (89) (13) Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,072 $1,717 1,405 (420) (124) (776) (644) (145) (99) $ 914 $341 57 — — (4) (6) — (2) $ 3,160 2,658 (796) (224) (1,311) (767) (234) (114) $386 $ 2,372 (1) All net activity within the consumer portfolio segment other than sales and transfers to held for sale is included as a single net number within the additions line, due to the relative immateriality of consumer non-accrual loans. 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. (2) (3) Transfers to held for sale are shown net of charge-offs of $513 million recorded upon transfer. For additional discussion, see Note 6 “Allowance for Credit Losses” to the consolidated financial statements. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation and amortization, as applicable. Premises and equipment at December 31, 2011 decreased $194 million to $2.4 billion compared to year-end 2010. This decrease primarily resulted from depreciation expense. 95 Goodwill Goodwill totaled $4.8 billion at December 31, 2011 compared to $5.6 billion in 2010. Refer to the “Critical Accounting Policies” section earlier in this report for detailed discussions of the Company’s methodology for testing goodwill for impairment and the $745 million impairment charge taken during 2011. Refer to Note 1 “Summary of Significant Accounting Policies” and Note 9 “Intangible Assets” to the consolidated financial statements, for the methodologies and assumptions used in Step One of the goodwill impairment test. Additionally, Note 1 “Summary of Significant Accounting Policies” to the consolidated financial statements includes information related to the fair value measurements of certain assets and liabilities and the valuation methodology of such pricing, which is also used for testing goodwill for impairment. Mortgage Servicing Rights Mortgage servicing rights at December 31, 2011 totaled $182 million compared to $267 million at December 31, 2010. A summary of mortgage servicing rights is presented in Note 7 “Servicing of Financial Assets” to the consolidated financial statements. The balances shown represent the right to service mortgage loans that are owned by other investors. Mortgage servicing rights are presented at fair value as of December 31, 2011 and 2010. On January 1, 2009, Regions began accounting for mortgage servicing rights at fair market value with any changes to fair value being recorded within mortgage income. Also, in early 2009, Regions entered into derivative and trading asset transactions to mitigate the impact of market value fluctuations related to mortgage servicing rights. However, derivative instruments entered into in the future could be materially different from the current risk profile of Regions’ current portfolio. See the “Mortgage Income” section earlier in this report for detail regarding the effect of mortgage servicing rights and related hedging items on Regions’ consolidated statement of operations. Other Identifiable Intangible Assets Other identifiable intangible assets totaled $449 million at December 31, 2011 compared to $385 million at December 31, 2010. The year-over-year increase was due to the acquisition of Regions’ credit card portfolio that resulted in recognition of approximately $175 million of purchased credit card intangibles. This increase was partially offset by amortization of core deposit intangibles. Regions noted no indicators of impairment for any other identifiable intangible assets during 2011 or 2010. See Note 9 “Intangible Assets” to the consolidated financial statements for further information. Foreclosed Properties Other real estate and certain other assets acquired in foreclosure are reported at the lower of the investment in the loan or fair value of the property less estimated costs to sell. The following table summarizes foreclosed property activity for the years ended December 31: Table 22—Foreclosed Properties Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfer from loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreclosed property sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 2010 (In millions) $ 454 532 (161) (518) (11) $ 607 649 (225) (565) (12) (158) (153) Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 296 $ 454 Note: Approximately 73 percent and 72 percent of the ending balances as of December 31, 2011 and 2010, respectively, relates to properties transferred in to foreclosed properties during the corresponding calendar year. 96 Valuation adjustments are primarily recorded in other non-interest expense; adjustments are also recorded as a charge to the allowance for loan losses if incurred within 60 days after the date of transfer from loans. Valuation adjustments are primarily post-foreclosure write-downs that are a result of continued declining property values based on updated appraisals or other indications of value, such as offers to purchase. Foreclosed property sold represents the net book value of the properties sold. Other Assets Other assets decreased $675 million to $8.7 billion as of December 31, 2011. Securities sold but not yet settled near the end of 2010 primarily drove the decrease. Reduced foreclosed properties, deferred tax and prepaid expense balances also contributed to the year-over-year decrease. The decreases were partially offset by increased derivative asset balances. Deposits Regions competes with other banking and financial services companies for a share of the deposit market. Regions’ ability to compete in the deposit market depends heavily on the pricing of its deposits and how effectively the Company meets customers’ needs. Regions employs various means to meet those needs and enhance competitiveness, such as providing a high level of customer service, competitive pricing and providing convenient branch locations for its customers. Regions also serves customers through providing centralized, high-quality banking services and alternative product delivery channels such as internet banking. Deposits are Regions’ primary source of funds, providing funding for 85 percent of average interest-earning assets from continuing operations in 2011 and 82 percent of average interest-earning assets from continuing operations in 2010. Table 23 “Deposits” details year-over-year deposits on a period-ending basis. Total deposits as of year-end 2011 increased $1.0 billion, or 1 percent, compared to year-end 2010. The overall increase in deposits was primarily driven by an increase in non-interest-bearing demand accounts and interest-bearing transaction accounts. These increases were partially offset by decreases in domestic money market accounts and time deposits. Regions continues to manage and deepen existing customer relationships, as well as develop new relationships through client acquisition and new checking products. Customer deposits, which exclude deposits used for wholesale funding purposes, increased by 1 percent to $95.6 billion on an ending basis during 2011. An increase in interest-bearing transaction accounts was the main source of the increase, combined with an increase in non-interest-bearing demand accounts. A decrease in domestic money market accounts partially offset these increases. Due to liquidity in the market, Regions has been able to steadily grow its low-cost customer deposits and reduce its total deposit costs from 1.35 percent in 2009 to 0.78 percent in 2010 and to 0.49 percent in 2011. Table 23—Deposits Non-interest-bearing demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Savings accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest-bearing transaction accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market accounts—domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market accounts—foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Low-cost deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate treasury time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 2010 2009 $28,266 5,159 19,388 23,053 378 76,244 19,378 95,622 5 $95,627 (In millions) $25,733 4,668 13,423 27,420 569 71,813 22,784 94,597 17 $94,614 $23,204 4,073 15,791 23,291 766 67,125 31,468 98,593 87 $98,680 97 Regions elected to exit the Federal Deposit Insurance Corporation’s (“FDIC”) Transaction Account Guarantee (“TAG”) program on July 1, 2010. The TAG program was a component of the Temporary Liquidity Guarantee Program, whereby the FDIC guaranteed all funds held at participating institutions beyond the $250,000 deposit insurance limit in qualifying transaction accounts. Regions’ decision to exit the program did not have a significant impact on liquidity. When the Dodd-Frank Act was enacted in July 2010, it permanently increased the FDIC coverage limit to $250,000. Also as a result of the Dodd-Frank Act, effective as of December 31, 2010, unlimited coverage for non-interest bearing demand transaction accounts will be provided until January 1, 2013. Within customer deposits, non-interest-bearing demand deposits increased $2.5 billion to $28.3 billion, driven primarily by an increase in non-interest bearing deposits from commercial and small businesses. Non-interest-bearing deposits accounted for approximately 30 percent of total deposits at year-end 2011 as compared to 27 percent at year-end 2010. Savings balances increased $491 million to $5.2 billion, generally reflecting continued savings trends, spurred by economic uncertainty. Domestic money market products, which exclude foreign money market accounts, are one of Regions’ most significant funding sources. These balances decreased 16 percent in 2011 to $23 billion or 24 percent of total deposits, compared to 29 percent of total deposits in 2010. Money market accounts decreased in 2011 due to the product conversion to interest-bearing transaction deposits. Included in customer time deposits are certificates of deposit and individual retirement accounts. The balance of customer time deposits decreased 15 percent in 2011 to $19.4 billion compared to $22.8 billion in 2010. The decrease was primarily due to maturities with minimal reinvestment by customers as a result of a decline in rates offered on these products. Customer time deposits accounted for 20 percent of total deposits in 2011 compared to 24 percent in 2010. Consistent with 2010, total treasury deposits, which are used mainly for overnight funding purposes, remained at low levels in 2011 as the Company continued to utilize customer-based funding and other sources. The Company’s choice of overnight funding sources is dependent on the Company’s particular funding needs and the relative attractiveness of each source. The sensitivity of Regions’ deposit rates to changes in market interest rates is reflected in Regions’ average interest rate paid on interest-bearing deposits. The rate paid on interest-bearing deposits decreased to 0.69 percent in 2011 from 1.04 percent in 2010, driven by the expiration of time deposits, the positive mix shift to lower cost customer products, and continuation of the low interest rate environment throughout 2011. Table 24 “Maturity of Time Deposits of $100,000 or More” presents maturities of time deposits of $100,000 or more at December 31, 2011 and 2010. Table 24—Maturity of Time Deposits of $100,000 or More Time deposits of $100,000 or more, maturing in: 3 months or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Over 3 through 6 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Over 6 through 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Over 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 2010 (In millions) $1,216 1,504 1,910 3,061 $1,878 1,396 1,898 3,679 $7,691 $8,851 98 Short-Term Borrowings See Note 11 “Short-Term Borrowings” to the consolidated financial statements for a summary of these borrowings at December 31, 2011 and 2010. Short-term borrowings totaled $3.1 billion at December 31, 2011, compared to $3.9 billion at December 31, 2010. The levels of these borrowings can fluctuate depending on the Company’s funding needs and the sources utilized, as well as a result of customers’ activity. COMPANY FUNDING SOURCES Short-term borrowings used as a source of funding for the company totaled $1.0 billion at December 31, 2011, compared to $1.5 billion at December 31, 2010. Short-term FHLB advances were $500 million at December 31, 2010 and there were no such borrowings at December 31, 2011. Table 25 “Selected Short-Term Borrowings Data” provides selected information for certain short-term borrowings used for funding purposes for the years 2011, 2010, and 2009. Table 25—Selected Short-Term Borrowings Data 2011 2010 2009 (Dollars in millions) Federal funds purchased: Balance at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average outstanding (based on average daily balances) . . . . . . . . . . . . . . . . . . . . . Maximum amount outstanding at any month-end . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average interest rate at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average interest rate on amounts outstanding during the year (based on average daily balances) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 18 19 22 0.1% 19 68 106 0.1% $ 30 441 2,011 0.1% 0.1% 0.1% 0.2% Securities sold under agreements to repurchase: Balance at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average outstanding (based on average daily balances) . . . . . . . . . . . . . . . . . . . . . Maximum amount outstanding at any month-end . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average interest rate at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average interest rate on amounts outstanding during the year (based on average daily balances) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 763 456 1,151 $969 419 969 (0.2)% 0.3% $ 448 724 1,445 0.4% (0.6)% 0.2% 0.9% The negative weighted-average interest rates on securities sold under agreements to repurchase during 2011 were the result of, in part, Regions’ entering into reverse-repurchase agreements. There are times when financing costs associated with these transactions are lower than typical repurchase agreement rates as a result of a supply and demand imbalance in particular collateral. Since short-term repurchase agreement rates were close to zero during the last half of 2011, the supply and demand imbalance related to securities that Regions owned led to negative financing rates. CUSTOMER-RELATED BORROWINGS Short-term borrowings that are the result of customer activity related to investment opportunities or brokerage interests totaled $2.1 billion at December 31, 2011, compared to $2.4 billion at December 31, 2010. The primary driver of this decrease was a $588 million decrease in repurchase agreements offered as commercial banking investment opportunities for customers. Repurchase agreements are also offered as commercial banking products as short-term investment opportunities for customers. At the end of each business day, customer balances are swept into the agreement account. In exchange for cash, Regions sells the customer securities with a commitment to repurchase them on 99 the following business day. The repurchase agreements are collateralized to allow for market fluctuations. Securities from Regions Bank’s investment portfolio are used as collateral. From the customer’s perspective, the investment earns more than a traditional money market instrument. From Regions’ standpoint, the repurchase agreements are similar to deposit accounts, although they are not insured by the FDIC or guaranteed by the United States or agencies. Regions Bank does not manage the level of these investments on a daily basis as the transactions are initiated by the customers. The level of these borrowings can fluctuate significantly on a day-to-day basis. Long-Term Borrowings Regions’ long-term borrowings consist primarily of FHLB borrowings, senior notes, subordinated notes and other long-term notes payable. Total long-term borrowings decreased $5.1 billion to $8.1 billion at December 31, 2011. At the parent company, the decrease resulted from the maturity of approximately $1.0 billion of subordinated notes. At the bank level, $2.0 billion of senior bank notes matured, which were originally issued under the Temporary Liquidity Guarantee Program (“TLGP”). As of December 31, 2011, Regions had no remaining borrowings under the TLGP. Also at the bank level, approximately $1.8 billion of FHLB advances and $200 million of other long-term debt matured during 2011. The weighted-average interest rate on total long-term debt, including the effect of derivative instruments, was 3.3%, 3.2% and 3.6% for the years ended December 31, 2011, 2010 and 2009, respectively. See Note 12 “Long-Term Borrowings” to the consolidated financial statements for further discussion and detailed listing of outstandings and rates. Ratings During 2011, both Standard & Poor’s (“S&P”) and Fitch Ratings (“Fitch”) revised their outlook for Regions and Regions Bank to stable from negative. Also during 2011, S&P upgraded Regions’ junior subordinated notes to B+ from B. As of December 31, 2011, S&P and Moody’s Investors Service (“Moody’s”) credit ratings for Regions Financial Corporation were below investment grade. For Regions Bank, Moody’s credit ratings were below investment grade. Also, Moody’s and Dominion Bond Rating Service (“DBRS”) continue to have negative outlooks for Regions Financial Corporation and Regions Bank. Table 26 “Credit Ratings” reflects the debt ratings information of Regions Financial Corporation and Regions Bank by S&P, Moody’s, Fitch and DBRS as of December 31, 2011 and 2010. Table 26—Credit Ratings As of December 31, 2011 Standard & Poor’s Moody’s Fitch DBRS Regions Financial Corporation Senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Junior subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BB+ BB B+ Regions Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-3 Short-term debt Long-term bank deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated debt BBB- BBB- BB+ Ba3 B1 B2 NP (1) Ba1 Ba2 Ba3 BBB- BBB BB+ BB BBBL BBBL R-2H F3 BBB BBBH BBB- BBBH BB+ BBB Outlook December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stable Negative (2) Stable Negative (1) Not Prime (2) On February 14, 2012, Moody’s revised outlook to stable. 100 As of December 31, 2010 Standard & Poor’s Moody’s Fitch DBRS Regions Financial Corporation Senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BB+ Subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BB Junior subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B Regions Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-3 Short-term debt Long-term bank deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BBB- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BBB- Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BB+ Subordinated debt Outlook Ba3 B1 B2 NP(1) Ba1 Ba2 Ba3 BBB- BB+ BB F3 BBB BBB- BB+ BBB BBBL BBBL R-2H BBBH BBBH BBB December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Negative Negative Negative Negative (1) Not Prime In general, ratings agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, probability of government support, and level and quality of earnings. Any downgrade in credit ratings by one or more ratings agencies may impact Regions in several ways, including, but not limited to, Regions’ access to the capital markets or short-term funding, borrowing cost and capacity, collateral requirements, acceptability of its letters of credit, and funding of variable rate demand notes (“VRDNs”), thereby potentially adversely impacting Regions’ financial condition and liquidity. See the “Risk Factors” section of this Annual Report on Form 10-K 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. Stockholders’ Equity Stockholders’ equity decreased to $16.5 billion at year-end 2011 versus $16.7 billion at year-end 2010. In 2011, net losses reduced stockholders’ equity by $215 million, cash dividends declared reduced stockholders’ equity by $51 million for common stock and $175 million for preferred stock, and changes in accumulated other comprehensive income increased equity by $191 million. On May 7, 2009, the final results of the Federal Reserve’s Supervisory Capital Assessment Program (“SCAP”) were released requiring Regions to submit a capital plan to its regulators detailing the steps to be utilized to increase total Tier 1 common equity by $2.5 billion, of which at least $0.4 billion had to be new Tier 1 equity (see Table 2 “GAAP to Non-GAAP Reconciliation” and Table 27 “Capital Ratios” for further discussion). The Company’s public equity offering of common stock, announced May 20, 2009, resulted in the issuance of 460 million shares at $4 per share, generating proceeds of approximately $1.8 billion, net of issuance costs. The Company also issued 287,500 shares of mandatory convertible preferred stock, Series B (“Series B shares”), generating net proceeds of approximately $278 million in 2009. Accrued dividends on the Series B shares reduced retained earnings by $12 million and $19 million during 2010 and 2009, respectively. In November 2009, a single investor converted approximately 20,000 Series B shares to common shares as allowed under the original transaction documents. On June 18, 2010, as allowed by the terms of the Series B shares, Regions initiated an early conversion of all of the remaining outstanding Series B shares. Dividends accrued and 101 unpaid at the conversion date were settled through issuance of common shares in accordance with the original document. Approximately 63 million common shares were issued in 2010 in the conversion and dividend settlement. No Series B shares were outstanding at December 31, 2011 or 2010. In addition to the offerings mentioned above, in 2009 the Company also issued approximately 33 million common shares in exchange for $202 million of outstanding 6.625 percent trust preferred securities issued by Regions Financing Trust II (“the Trust”). The trust preferred securities were exchanged for junior subordinated notes issued by the Company to the Trust. The Company recognized a pre-tax gain of approximately $61 million on the extinguishment of the junior subordinated notes. The increase in shareholders’ equity related to the debt for common share exchange was approximately $135 million, net of issuance costs. These public offerings along with other capital raising efforts resulted in Regions fully meeting the Tier 1 common equity capital requirement and exceeding the Tier 1 capital requirements prescribed by the SCAP (see Table 2 “GAAP to Non-GAAP Reconciliation” for further discussion). At December 31, 2011, Regions had 23 million common shares available for repurchase through open market transactions under an existing share repurchase authorization. There were no treasury stock purchases through open market transactions during 2011 or 2010. The Company’s ability to repurchase its common stock is limited by the terms of the Purchase Agreement between Regions and the U.S. Treasury entered into on November 14, 2008, pursuant to the U.S. Treasury’s Capital Purchase Program (“CPP”). See Part II, Item 5 (“Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”) for more information. Regions’ ratio of stockholders’ equity to total assets was 12.99 percent at December 31, 2011 and 12.64 percent December 31, 2010. Regions’ ratio of tangible common stockholders’ equity (stockholders’ equity less preferred stock, goodwill and other identifiable intangibles and the related deferred tax liability) to total tangible assets was 6.58 percent at December 31, 2011 compared to 6.04 percent at December 31, 2010 (see Table 2 “GAAP to Non-GAAP Reconciliation” for further discussion). The increase between years was a result of the change in accumulated other comprehensive income and the reduction in tangible assets. In 2011 and 2010, Regions’ annual dividend was $0.04 per common share compared to $0.13 in 2009. Regions does not expect to increase its quarterly dividend above $0.01 per common share for the foreseeable future. BANK REGULATORY CAPITAL REQUIREMENTS Regions and Regions Bank are required to comply with regulatory capital requirements established by Federal and State banking agencies. These regulatory capital requirements involve quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items, and also qualitative judgments by the regulators. Failure to meet minimum capital requirements can subject the Company to a series of increasingly restrictive regulatory actions. Currently, there are two basic measures of capital adequacy: a risk-based measure and a leverage measure. The risk-based capital requirements are designed to make regulatory capital requirements more sensitive to differences in credit and market risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and interest rate risk, and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with specified risk-weighting factors. The resulting capital ratios represent capital as a percentage of total risk-weighted assets, inclusive of off-balance sheet items. Banking organizations that are considered to have excessive interest rate risk exposure are required to maintain higher levels of capital. 102 The minimum standard for the ratio of total capital to risk-weighted assets is 8 percent. At least 50 percent of that capital level must consist of common equity, undivided profits and non-cumulative perpetual preferred stock, senior perpetual preferred stock issued to the U.S. Treasury under the Capital Purchase Program, minority interests relating to qualifying common or noncumulative perpetual preferred stock issued by a consolidated U.S. depository institution or foreign bank subsidiary, less goodwill, disallowed deferred tax assets and certain other intangibles (“Tier 1 capital”). The remainder (“Tier 2 capital”) may consist of a limited amount of other preferred stock, mandatorily convertible securities, subordinated debt, and a limited amount of the allowance for loan losses. The sum of Tier 1 capital and Tier 2 capital is “total risk-based capital” or total capital. However, under the Collins Amendment, which was passed as a section of the Dodd-Frank Act, trust preferred securities will be eliminated as an element of Tier 1 capital. This disallowance of trust preferred securities will be phased in from January 1, 2013 to January 1, 2016. Debt or equity instruments issued to the Federal government as part of the CPP are exempt from the Collins Amendment. As of December 31, 2011, Regions had $846 million of trust preferred securities that are subject to the Collins Amendment and $3.5 billion of preferred equity that is exempt from the Collins Amendment. The banking regulatory agencies also have adopted regulations that supplement the risk-based guidelines to include a minimum ratio of 3 percent of Tier 1 capital to average assets less goodwill and disallowed deferred tax assets (the “Leverage ratio”). Depending upon the risk profile of the institution and other factors, the regulatory agencies may require a Leverage ratio of 1 percent to 2 percent above the minimum 3 percent level. In recent years, the Federal Reserve and banking regulators began supplementing their assessment of the capital adequacy of a bank based on a variation of Tier 1 capital, known as Tier 1 common equity. This measure has been a key component of assessments of capital adequacy under the Comprehensive Capital Analysis and Review (“CCAR”) process. While not currently codified 1, analysts and banking regulators have assessed Regions’ capital adequacy using the Tier 1 common and/or the tangible common stockholders’ equity measure. Because tangible common stockholders’ equity and Tier 1 common equity are not formally defined by GAAP or codified in the federal banking regulations, these measures are considered to be non-GAAP financial measures and other entities may calculate them differently than Regions’ disclosed calculations (see Table 2 “GAAP to Non-GAAP Reconciliation” for further details). The Dodd-Frank Act requires the Federal Reserve to impose more stringent capital requirements on bank holding companies with assets of $50 billion or more. Consequently, as part of Regions’ annual CCAR, Regions must submit its annual capital plans to the Federal Reserve. As part of the CCAR, Regions is required to submit four scenarios including the company’s baseline forecast, the Federal Reserve’s baseline outlook, the Company’s stress case and the Federal Reserve’s stress case. Regions is required to maintain its capital levels above each minimum regulatory capital ratio and above a Tier 1 common ratio of 5 percent on a pro forma basis under expected and stressful conditions throughout a certain time period horizon. Any capital actions requested by Regions must be submitted to the Federal Reserve for approval. The Federal Reserve has committed to responding to Regions capital plans by mid-March 2012. The Federal Reserve intends to publish the results of the supervisory stress test component of CCAR for Regions and all companies that are participating. Regions is evaluating the anticipated impact of Basel III based on the proposal by the Basel Committee on Banking Supervision, which will begin in 2013 and is expected to be fully phased-in on January 1, 2019. The Company’s estimated Tier 1 capital and Tier 1 common ratios as of December 31, 2011, based on Regions’ current understanding of the guidelines, were approximately 11.39 and 7.70 percent, respectively, which are above the Basel III minimums of 8.5 percent for Tier 1 capital and 7 percent for Tier 1 common. Based on Regions’ understanding of the calculation for the liquidity coverage ratio under Basel III, Regions currently 1 On December 20, 2011 the Board of Governors of the Federal Reserve released a Notice of Proposed Rulemaking on enhanced capital standards and early remediation requirements mandated by sections 165 and 166 of the Dodd-Frank Act. If enacted as proposed this would codify the calculation of Tier 1 Common Capital. 103 meets the requirement due to the Company’s current cash and investment positions. Should Regions’ cash position or investment mix change in the future, Regions’ ability to meet the liquidity coverage ratio may be impacted. Additionally, there is still need for clarification of the Basel III rules as well as interpretation and implementation by U.S. banking regulators, such that the ultimate impact of Basel III on Regions is not completely known at this point. Because the Basel III capital calculations are not formally defined by GAAP and are not currently codified in the federal banking regulations, these measures are considered to be non-GAAP financial measures, and other entities may calculate them differently than Regions’ disclosed calculations (see Table 2 “GAAP to Non-GAAP Reconciliation” for further details). See the “Supervision and Regulation—Capital Requirements” subsection of the “Business” section and the “Risk Factors” section for more information. See Note 13 “Regulatory Capital Requirements and Restrictions” to the consolidated financial statements for further details. As of December 31, 2011, Regions Bank had the requisite capital levels to qualify as well capitalized. Table 27—Capital Ratios Risk-based capital: December 31 2011 2010 (Dollars in millions) Stockholders’ equity (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive (income) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-qualifying goodwill and intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disallowed deferred tax assets (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disallowed servicing assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Qualifying non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Qualifying trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,499 69 (4,900) (432) (35) 92 846 $16,734 260 (5,706) (424) (27) 92 846 Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Qualifying subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted allowance for loan losses (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,139 2,145 1,164 90 11,775 2,418 1,213 121 Tier 2 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,399 3,752 Total capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,538 $15,527 Risk-weighted assets (regulatory) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital ratios: $91,449 $94,966 Tier 1 common risk-based ratio (non-GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tier 1 capital to total risk-weighted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total capital to total risk-weighted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity to total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stockholders’ equity to total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tangible common equity to tangible assets (non-GAAP) 8.51 % 13.28 16.99 9.91 12.99 10.30 6.58 7.85% 12.40 16.35 9.30 12.64 10.09 6.04 (1) Only one year of projected future taxable income may be applied in calculating deferred tax assets for (2) regulatory capital purposes. Includes $78 million and $119 million in 2011 and 2010, respectively, associated with reserves recorded for off-balance sheet credit exposures, including derivatives. 104 OFF-BALANCE SHEET ARRANGEMENTS Regions has certain variable interests in unconsolidated variable interest entities (i.e., Regions is not the primary beneficiary). Regions owns the common stock of subsidiary business trusts, which have issued mandatorily redeemable preferred capital securities (“trust preferred securities”) in the aggregate of $1 billion at the time of issuance. These trusts meet the definition of a variable interest entity of which Regions is not the primary beneficiary; the trusts’ only assets are junior subordinated debentures issued by Regions, which were acquired by the trusts using the proceeds from the issuance of the trust preferred securities and common stock. The junior subordinated debentures are included in long-term borrowings (see Note 12 “Long-Term Borrowings” to the consolidated financial statements), and Regions’ equity interests in the business trusts are included in other assets. For regulatory reporting and capital adequacy purposes, the Federal Reserve Board has indicated that such trust preferred securities currently constitute Tier 1 capital, but beginning in 2013, trust preferred securities will be phased out as an allowable component of Tier 1 capital over a three-year period. Additional discussion regarding the status of capital treatment for these instruments is included in the “Supervision and Regulation— Capital Requirements” section of Item 1 of this Annual Report on Form 10-K. Also, Regions periodically invests in various limited partnerships that sponsor affordable housing projects, which are funded through a combination of debt and equity. Regions’ maximum exposure to loss as of December 31, 2011 was $873 million, which included $184 million in unfunded commitments to the partnerships. Additionally, Regions has short-term construction loans or letters of credit commitments with the partnerships totaling $180 million as of December 31, 2011. The funded portion of these loans and letters of credit was $59 million at December 31, 2011. The funded portion is included with loans on the consolidated balance sheets. See Note 2 “Variable Interest Entities” to the consolidated financial statements for further discussion. EFFECTS OF INFLATION The majority of assets and liabilities of a financial institution are monetary in nature; therefore, a financial institution differs greatly from most commercial and industrial companies, which have significant investments in fixed assets or inventories that are greatly impacted by inflation. However, inflation does have an important impact on the growth of total assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity-to-assets ratio. Inflation also affects other expenses that tend to rise during periods of general inflation. Management believes the most significant potential impact of inflation on financial results is a direct result of Regions’ ability to manage the impact of changes in interest rates. Management attempts to maintain an essentially balanced position between rate-sensitive assets and liabilities in order to minimize the impact of interest rate fluctuations on net interest income. However, this goal can be difficult to completely achieve in times of rapidly changing rate structure and is one of many factors considered in determining the Company’s interest rate positioning. The Company is asset sensitive as of December 31, 2011. Refer to Table 28 “Interest Rate Sensitivity” for additional details on Regions’ interest rate sensitivity. EFFECTS OF DEFLATION A period of deflation would affect all industries, including financial institutions. Potentially, deflation could lead to lower profits, higher unemployment, lower production and deterioration in overall economic conditions. In addition, deflation could depress economic activity and impair bank earnings through increasing the value of debt while decreasing the value of collateral for loans. If the economy experienced a severe period of deflation, then it could depress loan demand, impair the ability of borrowers to repay loans and sharply reduce bank earnings. 105 Management believes the most significant potential impact of deflation on financial results relates to Regions’ ability to maintain a high amount of capital to cushion against future losses. In addition, the Company can utilize certain risk management tools to help it maintain its balance sheet strength even if a deflationary scenario were to develop. RISK MANAGEMENT Risk identification and risk management are key elements in the overall management of Regions. Management believes the primary risk exposures are market risk, liquidity risk, counterparty risk, international risk and credit risk. Market risk is the price and earnings variability (mainly reductions) arising from adverse changes in 1) the fair values of financial instruments due to changes in interest rates, exchange rates, commodity prices, equity prices or the credit quality of debt securities and/or 2) the impact to net interest income based on changes in interest rates and the associated impact on prepayments. Regions’ market risk is made up of three components: interest rate risk, prepayment risk, and capital markets and brokerage-related risks (primarily associated with Morgan Keegan). Interest rate risk is the risk to net interest income due to the impact of movements in interest rates. Prepayment risk is the risk that borrowers may repay their loans or other debt earlier than at their stated maturities. The Company, primarily through Morgan Keegan, is also subject to various market-related risks associated with its brokerage and market-related activities. Liquidity risk relates to Regions’ ability to fund present and future obligations. Counterparty risk represents the risk that a counterparty will not comply with its contractual obligations. International risk, or country exposure, is defined as the aggregation of exposure Regions has with financial institutions, companies, or individuals in a given country outside of the United States. Credit risk represents the risk that parties indebted to Regions fail to perform as contractually obligated. Regions’ primary credit risk arises from the possibility that borrowers may not be able to repay loans, and to a lesser extent, the failure of securities issuers and counterparties to perform as contractually required. Management follows a formal policy to evaluate and document the key risks facing each line of business, how those risks can be controlled or mitigated, and how management monitors the controls to ensure that they are effective. Separate from risk acceptance, there is an independent risk assessment and reporting program. To ensure that risks within the Company are presented and appropriately addressed, the Board has designated a Risk Committee of outside directors. The Risk Committee’s focus is on Regions’ overall risk profile, and the committee receives reports from the Company’s management quarterly. Additionally, Regions’ Internal Audit Division performs ongoing, independent reviews of the risk management process which are reported to the Audit Committee of the Board of Directors. Some of the more significant processes used to manage and control these and other risks are described in the remainder of this report. External factors beyond management’s control may result in losses despite risk management efforts. MARKET RISK—INTEREST RATE RISK Regions’ primary market risk is interest rate risk, including uncertainty with respect to absolute interest rate levels as well as uncertainty with respect to relative interest rate levels, which is impacted by both the shape and the slope of the various yield curves that affect the financial products and services that the Company offers. To quantify this risk, Regions measures the change in its net interest income in various interest rate scenarios compared to a base case scenario. Net interest income sensitivity is a useful short-term indicator of Regions’ interest rate risk. Sensitivity Measurement—Financial simulation models are Regions’ primary tools used to measure interest rate exposure. Using a wide range of sophisticated simulation techniques provides management with extensive information on the potential impact to net interest income caused by changes in interest rates. Models are structured to simulate cash flows and accrual characteristics of Regions’ balance sheet. Assumptions are made about the direction and volatility of interest rates, the slope of the yield curve, and the changing composition of the balance sheet that result from both strategic plans and from customer behavior. Among the assumptions are 106 expectations of balance sheet growth and composition, the pricing and maturity characteristics of existing business and the characteristics of future business. Interest rate-related risks are expressly considered, such as pricing spreads, the lag time in pricing deposit accounts, prepayments and other option risks. Regions considers these factors, as well as the degree of certainty or uncertainty surrounding their future behavior. The primary objective of asset/liability management at Regions is to coordinate balance sheet composition with interest rate risk management to sustain a reasonable and stable net interest income throughout various interest rate cycles. In computing interest rate sensitivity for measurement, Regions compares a set of alternative interest rate scenarios to the results of a base case scenario based on “market forward rates.” The standard set of interest rate scenarios includes the traditional instantaneous parallel rate shifts of plus 100 and 200 basis points. Regions also prepares a minus 50 basis points scenario, as minus 100 and 200 basis point scenarios are not considered realistic in the current rate environment. Up-rate scenarios of greater magnitude are also analyzed, and are of increased importance as the current and historic low levels of interest rates increase the relative likelihood of a rapid and substantial increase in interest rates. Regions also includes simulations of gradual interest rate movements that may more realistically mimic potential interest rate movements. These gradual scenarios include curve steepening, flattening, and parallel movements of various magnitudes phased in over a six-month period, and include rate shifts of minus 50 basis points and plus 100 and 200 basis points. Exposure to Interest Rate Movements—As of December 31, 2011, Regions was moderately asset sensitive to both gradual and instantaneous rate shifts as compared to the base case for the measurement horizon ending December 2012. The protractedly low interest-rate environment that has prevailed over the past few years has led many borrowers, especially those with loans at fixed rates of interest, to refinance or prepay their loans. This has resulted in considerable pressure on net interest margin and net interest income as these loans and fixed rate investment securities were replaced by other assets at lower yields. However, at the same time, the broader economic conditions and the level of short-term interest-rates, in particular, produced ample opportunities for the reduction of deposit and borrowing costs. If long-term rates were to decline materially from the recent implied market-forward outlook, Regions’ loan and securities portfolios would expect to be subject to higher levels of prepayment. Deposit costs, having benefited from several years of very low short-term rates, would likely experience additional reduction from recent levels, but the magnitude of decline may not be as pronounced as in the past few years. In total, Regions estimates an impact of a 50 basis points instantaneous and gradual decline in interest rates at ($141) million and ($111) million respectively, for the measurement period ending December 2012. (Note that where scenarios would indicate negative interest rates, a minimum of zero is applied). In the converse environment, in which rates rise, Regions estimates that the speed of loan and securities prepayment will slow considerably and deposit rates would rise, but the negative impact of these factors would be more than offset by higher rates on new loans and securities as well as the repricing of existing floating rate loans. Table 28—Interest Rate Sensitivity Gradual Change in Interest Rates Estimated Annual Change in Net Interest Income December 31, 2011 +200 basis points . . . . . . . . . . . . . . . . . . . . . . . . +100 basis points . . . . . . . . . . . . . . . . . . . . . . . . -50 basis points . . . . . . . . . . . . . . . . . . . . . . . . . Instantaneous Change in Interest Rates +200 basis points . . . . . . . . . . . . . . . . . . . . . . . . +100 basis points . . . . . . . . . . . . . . . . . . . . . . . . -50 basis points . . . . . . . . . . . . . . . . . . . . . . . . . 107 (In millions) $ 300 173 (111) $ 364 222 (141) 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. The Asset and Liability Committee (“ALCO”), which consists of members of Regions’ senior management team, in its oversight role for the management of interest rate sensitivity, approves the use of derivatives in balance sheet hedging strategies. The most common derivatives Regions employs are forward rate contracts, Eurodollar futures contracts, interest rate swaps, options on interest rate swaps, interest rate caps and floors, and forward sale commitments. Derivatives are also used to offset the risks associated with customer derivatives, which include interest rate, credit and foreign exchange risks. Forward rate contracts are commitments to buy or sell financial instruments at a future date at a specified price or yield. A Eurodollar futures contract is a future on a Eurodollar deposit. Eurodollar futures contracts subject Regions to market risk associated with changes in interest rates. Because futures contracts are cash settled daily, there is minimal credit risk associated with Eurodollar futures. Interest rate swaps are contractual agreements typically entered into to exchange fixed for variable (or vice versa) streams of interest payments. The notional principal is not exchanged but is used as a reference for the size of interest settlements. Interest rate options are contracts that allow the buyer to purchase or sell a financial instrument at a predetermined price and time. Forward sale commitments are contractual obligations to sell market instruments at a future date for an already agreed-upon price. Foreign currency contracts involve the exchange of one currency for another on a specified date and at a specified rate. These contracts are executed on behalf of the Company’s customers and are used to manage fluctuations in foreign exchange rates. The Company is subject to the credit risk that another party will fail to perform. Regions has made use of interest rate swaps to effectively convert a portion of its fixed-rate funding position to a variable-rate position and, in some cases, to effectively convert a portion of its variable-rate loan portfolio to fixed-rate. Regions also uses derivatives to manage interest rate and pricing risk associated with its mortgage origination business. In the period of time that elapses between the origination and sale of mortgage loans, changes in interest rates have the potential to cause a decline in the value of the loans in this held-for-sale portfolio. Futures contracts and forward sale commitments are used to protect the value of the loan pipeline and loans held for sale from changes in interest rates and pricing. Regions manages the credit risk of these instruments in much the same way as it manages credit risk of the loan portfolios by establishing credit limits for each counterparty and through collateral agreements for dealer transactions. For non-dealer transactions, the need for collateral is evaluated on an individual transaction basis and is primarily dependent on the financial strength of the counterparty. Credit risk is also reduced significantly by entering into legally enforceable master netting agreements. When there is more than one transaction with a counterparty and there is a legally enforceable master netting agreement in place, the exposure represents the net of the gain and loss positions with and collateral received from and/or posted to that counterparty. The “Credit Risk” section in this report contains more information on the management of credit risk. Regions also uses derivatives to meet the needs of its customers. Interest rate swaps, interest rate options and foreign exchange forwards are the most common derivatives sold to customers. Other derivatives instruments with similar characteristics are used to hedge market risk and minimize volatility associated with this portfolio. Instruments used to service customers are held in the trading account, with changes in value recorded in the consolidated statements of 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 108 accuracy of its valuation assumptions, counterparty credit risk and changes in interest rates. See Note 20 “Derivative Financial Instruments and Hedging Activities” to the consolidated financial statements for a tabular summary of Regions’ year-end derivatives positions and further discussion. On January 1, 2009, Regions began accounting for mortgage servicing rights at fair market value with any changes to fair value being recorded within mortgage income. Also, in early 2009, Regions entered into derivative and balance sheet transactions to mitigate the impact of market value fluctuations related to mortgage servicing rights. Derivative instruments entered in the future could be materially different from the current risk profile of Regions’ current portfolio. MARKET RISK—PREPAYMENT RISK Regions, like most financial institutions, is subject to changing prepayment speeds on mortgage-related assets under different interest rate environments. Prepayment risk is a significant risk to earnings and specifically to net interest income. For example, mortgage loans and other financial assets may be prepaid by a debtor, so that the debtor may refinance its obligations at lower rates. As loans and other financial assets prepay in a falling rate environment, Regions must reinvest these funds in lower-yielding assets. Prepayments of assets carrying higher rates reduce Regions’ interest income and overall asset yields. Conversely, in a rising rate environment, these assets will prepay at a slower rate, resulting in opportunity cost by not having the cash flow to reinvest at higher rates. Prepayment risk can also impact the value of securities and the carrying value of equity. Regions’ greatest exposures to prepayment risks primarily rest in its mortgage-backed securities portfolio, the mortgage fixed-rate loan portfolio and the mortgage servicing asset, all of which tend to be sensitive to interest rate movements. Regions also has prepayment risk that would be reflected in non-interest income in the form of servicing income on loans sold. Regions actively monitors prepayment exposure as part of its overall net interest income forecasting and interest rate risk management. In particular, because interest rates are currently relatively low, Regions is actively managing exposure to declining prepayments that are expected to coincide with increasing interest rates in both the loan and securities portfolios. MARKET RISK—BROKERAGE AND OTHER MARKET ACTIVITY RISK When there are references to Morgan Keegan it should not be assumed or inferred that any specific activity mentioned is carried on by any particular Morgan Keegan entity. In addition, in early 2012, Regions entered into a stock purchase agreement to sell Morgan Keegan to Raymond James Financial, Inc. Refer to Note 3 “Discontinued Operations” and Note 25 “Subsequent Event” to the consolidated financial statements for further details. Morgan Keegan’s business activities, including its securities inventory positions and securities held for investment, expose it to market risk. Further, the Company is also exposed to market risk in its capital markets business, which includes derivatives, loan syndication and foreign exchange trading activities, and mortgage trading activity, which includes secondary marketing of loans to government-sponsored entities. Morgan Keegan trades for its own account in corporate and tax-exempt securities and U.S. Government agency and Government-sponsored securities. Most of these transactions are entered into to facilitate the execution of customers’ orders to buy or sell these securities. In addition, it trades certain equity securities in order to “make a market” in these securities. Morgan Keegan’s trading activities require the commitment of capital. All principal transactions place the subsidiary’s capital at risk. Profits and losses are dependent upon the skills of employees and market fluctuations. In order to mitigate the risks of carrying inventory and as part of other normal brokerage activities, Morgan Keegan assumes short positions on securities. In the normal course of business, Morgan Keegan enters into underwriting and forward and future commitments. As of December 31, 2011, the total notional amount of forward commitments was approximately $810 million. Morgan Keegan typically settles its position by entering into equal but opposite contracts and, as 109 such, the contract amounts do not necessarily represent future cash requirements. Settlement of the transactions relating to such commitments is not expected to have a material effect on Regions’ consolidated financial position. Transactions involving future settlement give rise to market risk, which represents the potential gain or loss that can be caused by a change in the market value of a particular financial instrument. Regions’ exposure to market risk is determined by a number of factors, including the size, composition and diversification of positions held, the absolute and relative levels of interest rates, and market volatility. Additionally, in the normal course of business, Morgan Keegan enters into transactions for delayed delivery, to-be-announced securities, which are recorded in trading account assets on the consolidated balance sheets at fair value. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from unfavorable changes in interest rates or the market values of the securities underlying the instruments. The credit risk associated with these contracts is typically limited to the cost of replacing all contracts on which Morgan Keegan has recorded an unrealized gain. For exchange-traded contracts, the clearing organization acts as the counterparty to specific transactions and, therefore, bears the risk of delivery to and from counterparties. Interest rate risk at Morgan Keegan arises from the exposure of holding interest-sensitive financial instruments such as government, corporate and municipal bonds, and certain preferred equities. Morgan Keegan manages its exposure to interest rate risk by setting and monitoring limits and, where feasible, entering into offsetting positions in securities with similar interest rate risk characteristics. Securities inventories recorded in trading account assets on the consolidated balance sheet, are marked to market, and, accordingly, there are no unrecorded gains or losses in value. While a significant portion of the securities inventories have contractual maturities in excess of five years, these inventories, on average, turn over in excess of twelve times per year. Accordingly, the exposure to interest rate risk inherent in Morgan Keegan’s securities inventories is less than that of similar financial instruments held by firms in other industries. Morgan Keegan’s equity securities inventories are exposed to risk of loss in the event of unfavorable price movements. Also, Morgan Keegan is subject to credit risk arising from non-performance by trading counterparties, customers and issuers of debt securities owned. This risk is managed by imposing and monitoring position limits, monitoring trading counterparties, reviewing security concentrations, holding and marking to market collateral, and conducting business through clearing organizations that guarantee performance. Morgan Keegan regularly participates in the trading of some derivative securities for its customers; however, this activity does not involve Morgan Keegan acquiring a position or commitment in these products and this trading is not a significant portion of Morgan Keegan’s business. Morgan Keegan has been an underwriter and dealer in auction rate securities. See Note 23 “Commitments, Contingencies and Guarantees” to the consolidated financial statements for more details regarding regulatory action related to Morgan Keegan auction rate securities. As of December 31, 2011, customers of Morgan Keegan owned approximately $675 thousand of auction rate securities, and Morgan Keegan held approximately $135 million of auction rate securities on the balance sheet. To manage trading risks arising from interest rate and equity price risks, Regions uses a Value at Risk (“VAR”) model along with other risk management methods to measure the potential fair value the Company could lose on its trading positions given a specified statistical confidence level and time-to-liquidate time horizon. The end-of-period VAR was approximately $423 thousand at December 31, 2011 and $805 thousand at December 31, 2010. Maximum daily VAR utilization during 2011 was $1.7 million and average daily VAR during the same period was $782 thousand. LIQUIDITY RISK Liquidity is an important factor in the financial condition of Regions and affects Regions’ ability to meet the borrowing needs and deposit withdrawal requirements of its customers. Regions intends to fund obligations primarily through cash generated from normal operations. In addition to these obligations, Regions has obligations related to potential litigation contingencies. See Note 23 “Commitments, Contingencies and Guarantees” to the consolidated financial statements for additional discussion of the Company’s funding requirements. 110 Assets, consisting principally of loans and securities, are funded by customer deposits, purchased funds, borrowed funds and stockholders’ equity. Regions’ goal in liquidity management is to satisfy the cash flow requirements of depositors and borrowers, while at the same time meeting the Company’s cash flow needs. The challenges of the current market environment demonstrate the importance of having and using various sources of liquidity to satisfy the Company’s funding requirements. In order to ensure an appropriate level of liquidity is maintained, Regions performs specific procedures including scenario analyses and stress testing at the bank, holding company, and affiliate levels. Regions’ policy is to maintain a sufficient level of funding to meet projected cash needs, including all debt service and maturities, for the subsequent two years at the parent company and acceptable periods for the bank and other affiliates. The Company’s current non-investment grade credit ratings makes access to short-term unsecured funding markets unreliable; therefore, the Company’s funding and contingency planning does not currently include any reliance on unsecured sources. Risk limits are established within the Company’s ALCO, which regularly reviews compliance with the established limits. Regions’ parent company cash and cash equivalents as of December 31, 2011 was $2.5 billion. Table 29—Contractual Obligations Deposits (1) . . . . . . . . . . . . . . . . . . . . . . . . . Short-term borrowings . . . . . . . . . . . . . . . . Long-term borrowings . . . . . . . . . . . . . . . . Lease obligations . . . . . . . . . . . . . . . . . . . . Purchase obligations . . . . . . . . . . . . . . . . . Benefit obligations (2) . . . . . . . . . . . . . . . . Commitments to fund low income housing partnerships (3) . . . . . . . . . . . . . Unrecognized tax benefits (4) . . . . . . . . . . . Visa litigation . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments Due By Period (5) 1-3 Years 4-5 Years More than 5 Years Indeterminable Maturity Total Less than 1 Year $12,313 3,067 1,853 170 10 12 $4,971 — 2,444 266 3 31 (In millions) 24 $ — 2,967 499 — 77 $2,075 — 846 208 — 25 305 — — — — — — — — — — 361 — — — — $76,244 — — — — — — 46 22 — $ 95,627 3,067 8,110 1,143 13 145 305 46 22 361 $17,730 $7,715 $3,515 $3,567 $76,312 $108,839 (1) Deposits with indeterminable maturity include non-interest bearing demand, savings, interest-bearing transaction accounts and money market accounts. (2) Amounts only include obligations related to the unfunded non-qualified pension plan and postretirement health care plan. (3) Commitments to fund low income housing partnerships do not have defined maturity dates. Therefore, they (4) have been considered due on demand, maturing one year or less. Includes liabilities for unrecognized tax benefits of $39 million and tax-related interest and penalties of $7 million. See Note 19 “Income Taxes” to the consoliated financial statements. (5) See Note 23 “Commitments, Contingencies and Guarantees,” to the consolidated financial statements for the Company’s commercial commitments at December 31, 2011. The securities portfolio is one of Regions’ primary sources of liquidity. Maturities of securities provide a constant flow of funds available for cash needs (see Note 4 “Securities” to the consolidated financial statements). The agency guaranteed mortgage portfolio is another source of liquidity in various secured borrowing capacities. In anticipation of regulatory changes proposed within the Basel III framework, in particular the Liquidity Coverage Ratio, Regions increased its holdings in securities backed by the Government National Mortgage Association (“GNMA”), which are explicitly backed by the U.S. Government. Additionally, the Company has $9.9 billion of unencumbered liquid securities available for pledging or repurchase agreements. 111 Maturities in the loan portfolio also provide a steady flow of funds (see Table 11 “Selected Loan Maturities”). At December 31, 2011, commercial loans and investor real estate mortgage and construction loans with an aggregate balance of $12.9 billion were due to mature in one year or less, although Regions may renew some of these lending arrangements if the risk profile is acceptable. Additionally, securities of $73 million were due to contractually mature in one year or less. Additional funds are provided from payments on consumer loans and one-to-four family residential first mortgage loans. In addition, liquidity needs can also be met by borrowing funds in state and national money markets, although Regions does not currently rely on unsecured wholesale market funding. Historically, Regions’ liquidity has been enhanced by its relatively stable customer deposit base. During 2010 and 2011, Regions’ customer base grew substantially in response to competitive offers and customers’ desire to lock-in rates in the falling rate environment, as well as the introduction of new consumer and business checking products. Regions elected to exit the FDIC’s TAG program on July 1, 2010. The TAG program was a component of the Temporary Liquidity Guarantee Program, whereby the FDIC guaranteed all funds held at participating institutions beyond the $250,000 deposit insurance limit in qualifying transaction accounts. The decision to exit the program did not have a significant impact on liquidity. The Dodd-Frank Act permanently increased the FDIC coverage limit to $250,000. As a result of the Dodd-Frank Act, effective December 31, 2010, unlimited coverage for non-interest bearing demand transaction accounts will be provided until January 1, 2013. Regulation Q prohibited banks from paying interest on business checking accounts in accordance with the Glass-Steagall Act of 1933. However, the Dodd-Frank Act repealed Regulation Q. In July 2011, financial institutions, such as Regions, were allowed to offer interest on corporate checking accounts. Regions responded to these changes by enhancing its existing core interest-bearing products. However, due to the low interest rate environment and unlimited FDIC insurance available on non-interest bearing balances until January 1, 2013, the company has not experienced, nor does it anticipate experiencing significant migration of business customer balances from non-interest bearing accounts to an interest-bearing account. Due to the potential for uncertainty and inconsistency in the unsecured funding markets, Regions has been maintaining higher levels of cash liquidity by depositing excess cash with the Federal Reserve Bank, which is the primary component of the balance sheet line item, “interest-bearing deposits in other banks.” At December 31, 2011, Regions had over $4.9 billion in excess cash on deposit with the Federal Reserve. Regions’ borrowing availability with the Federal Reserve Bank as of December 31, 2011, based on assets available for collateral at that date, was $19.4 billion. Regions periodically accesses funding markets through sales of securities with agreements to repurchase. Repurchase agreements are also offered through a commercial banking sweep product as a short-term investment opportunity for customers. All such arrangements are considered typical of the banking and brokerage industries and are accounted for as borrowings. Regions’ financing arrangement with the FHLB adds additional flexibility in managing its liquidity position. As of December 31, 2011, Regions’ borrowing availability from the FHLB totaled $5.4 billion. FHLB borrowing capacity is contingent on the amount of collateral pledged to the FHLB. Regions Bank and its subsidiaries have pledged certain residential first mortgage loans on one-to-four family dwellings and home equity lines of credit as collateral for the FHLB advances outstanding. Additionally, investment in FHLB stock is required in relation to the level of outstanding borrowings. Regions held $219 million in FHLB stock at December 31, 2011. The FHLB has been and is expected to continue to be a reliable and economical source of funding. In February 2010, Regions filed a shelf registration statement with the U.S. Securities and Exchange Commission. This shelf registration does not have a capacity limit and can be utilized by Regions to issue various debt and/or equity securities. The registration statement will expire in February 2013. In 2010, Regions issued from the shelf $250 million (par value) of 4.875% senior notes due April 2013 and $500 million (par value) of 5.75% senior notes due June 2015. 112 Regions’ Bank Note program allows Regions Bank to issue up to $20 billion aggregate principal amount of bank notes outstanding at any one time. No issuances have been made under this program as of December 31, 2011. Notes issued under the program may be senior notes with maturities from 30 days to 15 years and subordinated notes with maturities from 5 years to 30 years. These notes are not deposits and they are not insured or guaranteed by the FDIC. Regions may, from time to time, consider opportunistically retiring outstanding issued securities, including subordinated debt, trust preferred securities and preferred shares in privately negotiated or open market transactions for cash or common shares. Regulatory approval would be required for retirement of some instruments. Morgan Keegan maintains certain lines of credit with unaffiliated banks to manage liquidity in the ordinary course of business. See the “Short-Term Borrowings” section for further detail. See the “Stockholders’ Equity” section for discussion of the Federal Reserve’s Comprehensive Capital Analysis and Review. COUNTERPARTY RISK Regions manages and monitors its exposure to other financial institutions, also known as counterparty exposure, on an ongoing basis. The objective is to ensure that Regions appropriately identifies and reacts to risks associated with counterparties in a timely manner. This exposure may be direct or indirect exposure that could create legal, reputational or financial risk to the Company. Counterparty exposure may result from a variety of transaction types and may include exposure to commercial banks, savings and loans, insurance companies, broker/dealers, institutions that provide credit enhancements, and corporate debt issuers. Because transactions with a counterparty may be generated in one or more departments, credit limits are established for use by various areas of the Company including treasury, capital markets, finance, the mortgage division and lines of business. To manage counterparty risk, Regions has a centralized approach to approval, management and monitoring of exposure. To that end, Regions has a dedicated counterparty credit group and credit officer, as well as a documented counterparty credit policy. Exposures to counterparties are regularly aggregated across departments and reported to senior management. Regions has various counterparties that are regularly relied upon for market making capabilities, primarily broker-dealers. With these counterparties, Regions typically has in place margin agreements that are monitored daily, with margin posted to collateralize exposure as appropriate. Interaction with these counterparties is part of the risk management and monitoring process outlined above. INTERNATIONAL RISK Regions has minimal sovereign credit exposure except for an immaterial amount in government securities bonds to a single non-European sovereign, as well as a guarantee on a leveraged lease from a Western European government agency. However, Regions does have country exposure, which is defined as the aggregation of exposure Regions has with financial institutions, companies, or individuals in a given country outside of the United States. The majority of these exposures are in the form of derivative hedges (interest rate and foreign exchange), corporate securities and leveraged lease guarantees. This exposure is concentrated in highly-rated, Western European countries but not in those most severely affected by the recent Eurozone turmoil. In addition to Western Europe, Regions’ corporate securities include investments in corporations domiciled in other countries in Eastern Europe, North America and Australia. Regions has other smaller exposures in the form of trade confirmations, due from clearing accounts and loan participations with counterparties domiciled in countries in other regions, such as Latin America, Asia and the Middle East/North Africa region. 113 At December 31, 2011, Regions’ international exposure was approximately $500 million in total. Amounts in excess of 75 percent of the exposure relate to highly-rated Western European entities. Regions’ Counterparty Risk department is responsible for the setting of country limits and managing of the outstanding country exposure for all departments of the bank as well as monitoring compliance of the outstanding exposure to the set limits. Reports are sent to Counterparty Risk by the lines of business on a monthly basis to demonstrate their compliance with their set limits. Counterparty Risk conducts a formal, quarterly assessment of the exposure, on both an outstanding and limit basis, which is then distributed to upper management for review. CREDIT RISK Regions’ objective regarding credit risk is to maintain a high-quality credit portfolio that provides for stable credit costs with acceptable volatility through an economic cycle. See the “Credit Quality” section found earlier in this report for further information. Management Process Regions employs a credit risk management process with defined policies, accountability and regular reporting to manage credit risk in the loan portfolio. Credit risk management is guided by credit policies that provide for a consistent and prudent approach to underwriting and approvals of credits. Within the Credit Policy department, procedures exist that elevate the approval requirements as credits become larger and more complex. Generally, consumer credits and smaller commercial credits are centrally underwritten based on custom credit matrices and policies that are modified as appropriate. Larger commercial and investor real estate transactions are individually underwritten, risk-rated, approved and monitored. Responsibility and accountability for adherence to underwriting policies and accurate risk ratings lies in the lines of business. For consumer and small business portfolios, the risk management process focuses on managing customers who become delinquent in their payments and managing performance of the credit scorecards, which are periodically adjusted based on actual credit performance. Commercial business units are responsible for underwriting new business and, on an ongoing basis, monitoring the credit of their portfolios, including a complete review of the borrower semi-annually or more frequently as needed. To ensure problem commercial credits are identified on a timely basis, several specific portfolio reviews occur each quarter to assess the larger adversely rated credits for accrual status and, if necessary, to ensure such individual credits are transferred to Regions’ Problem Asset Management Division, which specializes in managing distressed credit exposures. There are also separate and independent commercial credit and consumer credit risk management organizational groups. These organizational units partner with the business line to assist in the processes described above, including the review and approval of new business and ongoing assessments of existing loans in the portfolio. Independent commercial and consumer credit risk management provides for more accurate risk ratings and the timely identification of problem credits, as well as oversight for the Chief Credit Officer on conditions and trends in the credit portfolios. Credit quality and trends in the loan portfolio are measured and monitored regularly and detailed reports, by product, business unit and geography, are reviewed by line of business personnel and the Chief Credit Officer. The Chief Credit Officer reviews summaries of these credit reports with executive management and the Board of Directors. Finally, the Credit Review department provides ongoing independent oversight of the credit portfolios to ensure policies are followed, credits are properly risk-rated and that key credit control processes are functioning as intended. 114 Risk Characteristics of the Loan Portfolio In order to assess the risk characteristics of the loan portfolio, Regions considers the current U.S. economic environment and that of its primary banking markets, as well as risk factors within the major categories of loans. Economic Environment in Regions’ Banking Markets One of the primary factors influencing the credit performance of Regions’ loan portfolio is the overall economic environment in the U.S. and the primary markets in which it operates. The Great Recession that began in December 2007 continued through 2008 and into 2009. Through this recessionary period, the overall output of goods and services experienced its sharpest decline since the early 1980s. Consumer spending, about 70 percent of all recorded spending, has been adversely impacted by declining inflation-adjusted income, low additional credit capacity, historically high required monthly debt payments, a negative employment outlook, a higher savings portion of after-tax personal income, and historically low consumer confidence. However, business sector output continues to grow, driven by replenishment of inventories that were highly depleted during the recession. In 2009, the economic downturn that began with the housing slowdown continued to negatively impact consumer confidence. In turn, lower confidence levels negatively affected demand for goods and services. This lower demand impacted retail sales and led to increased vacancy rates and lower rent rolls for the commercial real estate sector. High unemployment continued in 2009 but began improving in 2010 and 2011. Residential real estate prices were stable in 2010, but declined again in 2011. Concerns remain about the impact on real estate prices from the future sale of the large supply of homes that are either on bank balance sheets or have mortgages that are currently delinquent. Late in 2010, significant fiscal and monetary stimuli were implemented. The Federal Reserve approved the purchase of an additional $600 billion in U.S. Treasury bonds, and the Congress approved significant tax provisions that were expected to increase consumption, and, thereby, Gross Domestic Product (“GDP”). Even with these measures, the 1.7 percent growth in real GDP in 2011 trailed the 3.0 percent growth rate in 2010, as the U.S was negatively impacted by the ongoing credit crisis in the Eurozone. Overall, the consensus for 2012 is for marginally better but still below-trend economic growth. While the unemployment rate in the U.S declined from 9.4 percent in December 2010 to 8.5 percent in December 2011, the rate has been 8.5 percent or greater for 34 consecutive months. Portfolio Characteristics Regions has a diversified loan portfolio, in terms of product type, collateral and geography. At December 31, 2011, commercial loans represented 46 percent of total loans, net of unearned income, investor real estate loans represented 14 percent, residential first mortgage loans totaled 18 percent and other consumer loans, largely home equity lending, comprised the remaining 22 percent. Following is a discussion of risk characteristics of each loan type. Commercial—The commercial loan portfolio segment totaled $36.0 billion at year-end 2011 and primarily consists of loans to small and mid-sized commercial and large corporate customers with business operations in Regions’ geographic footprint. Loans in this portfolio are generally underwritten individually and are usually secured with the assets of the company and/or the personal guarantee of the business owners. Also considered as commercial loans are owner-occupied commercial real estate loans to businesses for long-term financing of land and buildings. Regions attempts to minimize risk on owner-occupied properties by requiring collateral values that exceed the loan amount, adequate cash flow to service the debt, and, in many cases, the personal guarantees of principals of the borrowers. Net charge-offs on commercial loans were 1.40 percent in 2011 compared to 1.86 percent in 2010. 115 Investor Real Estate—The investor real estate portfolio segment totaled $10.7 billion at year-end 2011 and includes various loan types. A large component of investor real estate loans is extensions of credit to real estate developers and investors for the financing of land or buildings, where the repayment is generated from the sale of the real estate or income generated by the real estate property. Net charge-offs on commercial investor real estate mortgage loans were 5.52 percent in 2011, as compared to 5.66 percent in 2010. Commercial investor real estate construction loans are primarily 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. These loans are generally underwritten and managed by a specialized real estate group that also manages loan disbursements during the construction process. Net charge-offs on commercial investor real estate construction decreased from 14.32 percent in 2010 to 11.71 percent in 2011. Residential First Mortgage—The residential first mortgage portfolio primarily contains loans to individuals, which are secured by single-family residences that are originated through Regions’ branch network. Loans of this type are generally smaller in size than commercial or investor real estate loans and are geographically dispersed throughout Regions’ market areas, with some guaranteed by government agencies or private mortgage insurers. Losses on the residential loan portfolio depend, to a large degree, on the level of interest rates, the unemployment rate, economic conditions and collateral values. During 2011, losses on single-family residences totaled 1.52 percent, as compared to 1.53 percent in 2010. Home Equity—The home equity portfolio totaled $13.0 billion at December 31, 2011, as compared to $14.2 billion at December 31, 2010. Substantially all of this portfolio was originated through Regions’ branch network. Losses in this portfolio generally track overall economic conditions. The main source of economic stress has been in Florida, where residential property values have declined significantly while unemployment rates rose to historically high levels. Losses on relationships in Florida where Regions is in a second lien position are higher than first lien losses. During 2011, losses on home equity decreased to 2.41 percent from 2.80 percent in 2010. Indirect—Indirect lending, which is lending initiated through third-party business partners, is largely comprised of loans made through automotive dealerships. Beginning in late 2010, the Company re-entered indirect auto lending. During 2011, this portfolio class increased $256 million to $1.8 billion. Losses on indirect loans were 0.75 percent for 2011, as compared to 0.99 percent for 2010. Consumer Credit Card—During 2011, Regions completed the purchase of approximately 500,000 existing Regions-branded consumer credit card accounts from FIA Card Services, adding approximately $1.0 billion in consumer principal balances. The products are primarily open-ended variable interest rate consumer credit card loans. Other Consumer —Other consumer loans include direct consumer installment loans, overdrafts and other revolving credit, and educational loans. Allowance for Credit Losses The allowance for credit losses represents management’s estimate of credit losses inherent in the portfolio as of year-end. The allowance for credit losses consists of two components: the allowance for loan losses and the reserve for unfunded credit commitments. Management’s assessment of the appropriateness of the allowance for credit losses is based on a combination of both of these components. Regions determines its allowance for credit losses in accordance with applicable accounting literature as well as regulatory guidance related to receivables and contingencies. Binding unfunded credit commitments include items such as letters of credit, financial guarantees and binding unfunded loan commitments. Allowance Process—Factors considered by management in determining the adequacy of the allowance include, but are not limited to: 1) detailed reviews of individual loans; 2) historical and current trends in gross and net loan charge-offs for the various classes of loans evaluated; 3) the Company’s policies relating to 116 delinquent loans and charge-offs; 4) the level of the allowance in relation to total loans and to historical loss levels; 5) levels and trends in non-performing and past due loans; 6) collateral values of properties securing loans; 7) the composition of the loan portfolio, including unfunded credit commitments; 8) management’s analysis of current economic conditions; 9) migration of loans between risk rating categories; and 10) estimation of inherent credit losses in the portfolio. In support of collateral values, Regions obtains updated valuations for non-performing loans on at least an annual basis. For loans that are individually identified for impairment in certain loan categories, those valuations are currently discounted from the most recent appraisal to consider continued declines in property values. The discounted valuations are utilized in the measurement of the level of impairment in the allowance calculation. For loans that are not individually identified for impairment and secured by real estate, Regions considers the impact of declines in real estate valuations in the loss given default estimates within the allowance calculation. Commercial and Consumer Credit Risk Management and Problem Asset Management are all involved in the credit risk management process to assess the accuracy of risk ratings, the quality of the portfolio and the estimation of inherent credit losses in the loan portfolio. This comprehensive process also assists in the prompt identification of problem credits. The Company has taken a number of measures to manage the portfolios and reduce risk, particularly in the more problematic portfolios. In addition, a strong Customer Assistance Program for consumer lending is in place which educates customers about options and initiates early contact with customers to discuss solutions when a loan first becomes delinquent. For loans that are not specifically reviewed, management uses information from its ongoing review processes to stratify the loan portfolio into pools sharing common risk characteristics. Loans that share common risk characteristics are assigned a portion of the allowance for credit losses based on the assessment process described above. Credit exposures are categorized by type and assigned estimated amounts of inherent loss based on several factors, including current and historical loss experience for each pool and management’s judgment of current economic conditions and their expected impact on credit performance. Adjustments to the allowance for loan losses calculated using a pooled approach are recorded through the provision for loan losses; adjustments to the reserve for unfunded credit commitments calculated using a pooled approach are recorded through noninterest expense. As a matter of business practice, Regions may require some form of credit support, such as a guarantee. Guarantees are legally binding and simultaneous with the primary loan agreements. Regions underwrites the ability of each guarantor to perform under its guarantee in the same manner and to the same extent as would be required to underwrite the repayment plan of a direct obligor. This entails obtaining sufficient information on the guarantor, including financial and operating information, to sufficiently measure a guarantor’s ability to perform, under the guarantee. Evaluation of guarantors’ ability and willingness to pay is considered as part of the risk rating process, which provides the basis for the allowance for loan losses for commercial and investor real estate portfolio segments. In some cases, the credit support provided by the guarantor is integral to the risk rating. In concluding that the risk rating is appropriate, Regions considers a number of factors including whether underlying cash flow is adequate to service the debt, payment history, and whether there is appropriate guarantor support. Accordingly, Regions has concluded that the impact of credit support provided by guarantors has been appropriately considered in the calculation and assessment of the allowance for loan losses. Management considers the current level of allowance for credit losses appropriate to absorb losses inherent in the loan portfolio and unfunded commitments. Management’s determination of the appropriateness of the allowance for credit losses, which is based on the factors and risk identification procedures previously discussed, requires the use of judgments and estimations that may change in the future. Changes in the factors used by management to determine the appropriateness of the allowance or the availability of new information could cause the allowance for credit losses to be increased or decreased in future periods. Management expects the allowance for credit losses to total loans ratio to vary over time due to changes in portfolio balances, economic conditions, loan mix and collateral values, or variations in other factors that may affect inherent losses. In addition, bank regulatory agencies, as part of their examination process, may require changes in the level of the allowance based on their judgments and estimates. 117 Details regarding the allowance for credit losses, including an analysis of activity from the previous year’s total, are included in Table 17 “Allowance for Credit Losses.” Also, refer to Table 18 “Allocation of the Allowance for Loan Losses” for details pertaining to management’s allocation of the allowance for loan losses to each loan category. FINANCIAL DISCLOSURE AND INTERNAL CONTROLS Regions has always maintained internal controls over financial reporting, which generally include those controls relating to the preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S. Regions’ process for evaluating internal controls over financial reporting starts with understanding the risks facing each of its functions and areas, how those risks are controlled or mitigated, and how management monitors those controls to ensure that they are in place and effective. These risks, control procedures and monitoring tools are documented in a standard format. This format not only documents the internal control structures over all significant accounts, but also places responsibility on management for establishing feedback mechanisms to ensure that controls are effective. These monitoring procedures are also part of management’s testing of internal controls. At least quarterly, each area updates and assesses the adequacy of its documented internal controls. If changes are necessary, updates are made more frequently. Regions has also established processes to ensure appropriate disclosure controls and procedures are maintained. These controls and procedures as defined by the Securities and Exchange Commission (“SEC”) are generally designed to ensure that financial and non-financial information required to be disclosed in reports filed with the SEC is reported within the time periods specified in the SEC’s rules and forms, and that such information is communicated to management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. Regions’ Disclosure Review Committee, which includes representatives from the legal, risk management, accounting, investor relations, treasury and audit departments, meets quarterly to review recent internal and external events to determine whether all appropriate disclosures have been made in reports filed with the SEC. In addition, the CEO and CFO meet quarterly with the SEC Filings Review Committee, which includes senior representatives from accounting, legal, risk management, audit, treasury, human resources, and operations and technology. The SEC Filings Review Committee reviews certain reports to be filed with the SEC, including Forms 10-K and 10-Q and evaluates the adequacy and accuracy of the disclosures. As part of this process, certifications of internal control effectiveness are obtained from accounting, treasury, legal, audit, risk management, human resources, administration, and operations and technology. These certifications are reviewed and presented to the CEO and CFO as support of the Company’s assessment of internal controls over financial reporting. The Forms 10-K and 10-Q are presented to the Audit Committee of the Board of Directors for approval. Financial results and other financial information are also reviewed with the Audit Committee on a quarterly basis. As required by applicable regulatory pronouncements, the CEO and the CFO review and make various certifications regarding the accuracy of Regions’ periodic public reports filed with the SEC, as well as the effectiveness of disclosure controls and procedures and internal controls over financial reporting. With the assistance of the financial review committees noted in the previous paragraph, Regions will continue to assess and monitor disclosure controls and procedures and internal controls over financial reporting, and will make refinements as necessary. COMPARISON OF 2010 WITH 2009—CONTINUING OPERATIONS Regions reported a net loss available to common shareholders of $763 million, or $0.62 per diluted common share, in 2010 compared to a net loss available to common shareholders of $1.3 billion, or $1.27 per diluted share, in 2009. Regions reported a loss from continuing operations available to common shareholders of $692 million, 118 or $0.56 per diluted common share, in 2010 compared to a loss from continuing operations available to common shareholders of $1.3 billion, or $1.32 per diluted share, in 2009. Significant drivers of 2010 results included an elevated provision for loan losses and other real estate expenses, as well as a $75 million regulatory charge. These items were partially offset by higher net interest income. Net interest income from continuing operations was $3.4 billion in 2010 compared to $3.3 billion in 2009. The net interest margin from continuing operations (fully-taxable equivalent basis) was 2.91 percent in 2010, compared to 2.68 percent during 2009. The margin improvement was driven primarily by a decrease of 61 basis points in the cost of interest-bearing liabilities, while being partially offset by a 31 basis point decline in the overall yield on interest earning assets. This dynamic reflected efforts to improve deposit costs and pricing on loans, while managing the challenges posed by a low interest rate environment. Long-term interest rates in particular remained low in 2010, pressuring yields on fixed-rate loan and securities portfolios, and contributed to the decline in the yield on taxable securities from 4.78 percent in 2009 to 3.66 percent in 2010. The overall costs of deposits improved from 1.35 percent in 2009 to 0.78 percent in 2010, although short-term interest rates (e.g. Fed Funds) remained relatively stable. Non-interest income from continuing operations totaled $2.5 billion in 2010, compared to $2.8 billion in 2009. The year-over-year decrease was due primarily to several items impacting 2009 with a lower or no corresponding impact on 2010. These 2009 items include gains from terminations of leveraged leases, which were largely offset by income taxes, a gain on extinguishment of debt realized in connection with the Company’s issuance of common stock in exchange for trust preferred securities, and gains related to transactions in Visa stock. Lower mortgage income, resulting from a decline in origination volume, also drove the year-over-year decline. These decreases were largely offset by higher gains from sales of securities in 2010, as well as increases in non-interest income attributable to service charges and capital markets and investment income. Capital markets and investment income increased $30 million to $69 million in 2010 from $39 million in 2009, primarily due to an increase in the capital markets revenues. Trust assets under management were approximately $76.6 billion at year-end 2010 compared to approximately $70.0 billion at year-end 2009. The rise in assets under management was primarily driven by a higher amount of asset inflows and higher end-of-period asset valuations than in the prior year. Service charges on deposit accounts increased 2 percent and totaled $1.2 billion in both 2010 and 2009. This modest increase was a result of a higher level of customer transactions and new account growth that began in 2009 and continued in 2010. These factors were slightly offset by policy changes, as well as changes related to Regulation E. In 2010, mortgage income decreased $12 million, or 5 percent to $247 million. The decrease was primarily driven by lower mortgage origination volume in 2010 as compared to 2009 due to decreased refinance activity during 2010 as compared to 2009. Mortgage originations totaled $8.2 billion in 2010 as compared to $9.6 billion in 2009. However, the decrease in origination income was partially offset by market valuation adjustments for mortgage servicing rights and related derivatives which added $16 million and $13 million to mortgage income in 2010 and 2009, respectively. Regions reported net gains of $394 million from the sale of securities available for sale in 2010, compared to net gains of $69 million in 2009. The Company’s gains were due to increased sales activity within the available-for-sale category as part of the Company’s asset/liability management strategies. In 2010, the Company repositioned its securities portfolio and sold $9.9 billion to mitigate prepayment risk and extended the duration of the investment portfolio. In 2009, the Company significantly reduced its exposure in non-agency investment securities, collateralized mortgage-backed securities and municipal bonds through sales of $5.4 billion of these securities, incurring some losses on the sales. The proceeds from the sales in 2010 and 2009 were reinvested in U.S. government agency mortgage-backed securities classified as available for sale. 119 Non-interest expense from continuing operations in 2010 included a $75 million regulatory charge. Non-interest expense, excluding the regulatory charge (non-GAAP), decreased $1 million to $3.8 billion in 2010. See Table 6 “Non-Interest Expense from Continuing Operations (including Non-GAAP reconciliation)” and the text preceding Table 2 “GAAP to Non-GAAP Reconciliation”. Salaries and employee benefits remained relatively stable at $1.6 billion in 2010. At December 31, 2010, Regions had 27,829 employees compared to 28,509 at December 31, 2009. Net occupancy expense decreased 3 percent to $411 million in 2010, due primarily to charges associated with the 2009 decision to consolidate 121 branches. Furniture and equipment expense decreased $4 million to $277 million in 2010. This decrease was primarily due to branch consolidation charges of $7 million incurred in 2009. Professional and legal fees are comprised of amounts related to legal, consulting and other professional fees. These fees increased $3 million to $170 million in 2010, reflecting an increase in the level of credit-related legal expenses in 2010. OREO expenses include the cost of adjusting foreclosed properties to fair value after these assets have been classified as OREO and net gains and losses on sales of properties, as well as other costs to maintain the property such as property taxes, security and grounds maintenance. Through Regions’ efforts to sell foreclosed properties, OREO balances decreased $153 million to $454 million in 2010 compared to $607 million in 2009. OREO expense increased $34 million to $209 million in 2010 compared to $175 million in 2009, primarily driven by valuation declines resulting from further deterioration of the housing and real estate markets. FDIC premiums decreased $7 million to $220 million in 2010. The decrease resulted from a $64 million special assessment in 2009. The FDIC made a number of changes to its assessment rate schedule, which drove an offsetting increase in premium rates. The bank regulatory agencies’ ratings, comprised of Regions Bank’s capital, asset quality, management, earnings, liquidity and sensitivity to risk, along with its long-term debt issuer ratings and financial ratios, were the primary factors in determining FDIC insurance premiums. Other miscellaneous expenses include communications, postage, supplies, credit-related costs and business development services. Other miscellaneous expenses decreased $43 million to $640 million in 2010. The Company’s income tax benefit for 2010 was $376 million compared to a tax benefit of $194 million in 2009, resulting in an effective tax rate of 44.5 percent and 15.3 percent, respectively. The increase in income tax benefit reflects the impact of the decline in the number and amount of leveraged lease terminations offset by the recognition of the regulatory charge and the decrease in the consolidated pre-tax loss. Net charge-offs totaled $2.8 billion, or 3.22 percent of average loans in 2010 compared to $2.3 billion, or 2.38 percent of average loans in 2009. The increased loss rate reflected seasoning of losses as the Company moved through the credit cycle as well as the impact of asset dispositions which increased charge-offs and decreased average loan balances. Charge-off ratios were higher across most major classes, with investor real estate experiencing the largest increase. Non-performing assets decreased from $4.4 billion at December 31, 2009 to $3.9 billion at December 31, 2010, reflecting management’s efforts to work through problem assets and reduce the riskiest exposures. The provision for loan losses is used to maintain the allowance for loan losses at a level that in management’s judgment is appropriate to cover losses inherent in the portfolio at the balance sheet date. During 2010 the provision for loan losses was $2.9 billion. This compares to a provision for loan losses of $3.5 billion in 2009. 120 At December 31, 2010, the allowance for loan losses totaled $3.2 billion or 3.84 percent of total loans, net of unearned income compared to $3.1 billion or 3.43 percent at year-end 2009. The increase in the allowance for loan loss ratio reflected management’s estimate of the level of inherent losses in the portfolio, which stabilized during 2010, as well as a result of the decline in the loan portfolio balance. Table 30—Quarterly Results of Operations 2011 2010 Fourth Quarter (3) Third Quarter Second Quarter First Quarter Fourth Quarter Third Quarter Second Quarter First Quarter (In millions, except per share data) Total interest income . . . . . . . . . . . . . . . . . . . . . . . Total interest expense . . . . . . . . . . . . . . . . . . . . . . . $1,031 182 $1,055 $1,076 $1,090 $1,120 $1,147 $1,167 $1,203 382 321 288 235 220 205 257 Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . . . . . . . . . . 849 295 850 355 856 398 855 482 863 682 859 760 846 651 821 770 Net interest income after provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . 554 495 458 373 181 99 195 51 Total non-interest income, excluding securities gains (losses), net Securities gains (losses), net . . . . . . . . . . . . . . . . . . Total non-interest expense . . . . . . . . . . . . . . . . . . . Income (loss) from continuing operations before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense (benefit) . . . . . . . . . . . . . . . . . Income (loss) from continuing operations . . . . . . . 500 7 1,124 (63) 18 (81) Discontinued operations Income (loss) from discontinued operations before income taxes . . . . . . . . . . . . . . . . . . Income tax expense (benefit) . . . . . . . . . . . . . (472) (5) Income (loss) from discontinued operations, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . (467) 514 (1) 850 158 17 141 24 10 14 519 24 956 45 (34) 79 4 (26) 30 498 82 932 21 (29) 50 36 17 19 587 333 990 111 44 67 31 9 22 488 2 910 516 — 966 504 59 993 (321) (157) (164) (255) (95) (160) (379) (168) (211) 16 7 (110) 7 9 (117) 22 7 15 Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $ (548) $ 155 $ 109 $ 69 $ 89 $ (155) $ (277) $ (196) Income (loss) from continuing operations available to common shareholders . . . . . . . . . . . . . . . . . Net income (loss) available to common $ (135) $ 87 $ 25 $ (2) $ 14 $ (218) $ (218) $ (270) shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (602) $ 101 $ 55 $ 17 $ 36 $ (209) $ (335) $ (255) Earnings (loss) per common share from continuing operations: (1) Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.11) (0.11) Earnings (loss) per common share: (1) Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends declared per share . . . . . . . . . . . . . Market price: (2) $ (0.48) (0.48) 0.01 $ 0.07 $ 0.02 $ (0.00) $ 0.01 $ (0.17) $ (0.18) $ (0.23) (0.23) 0.01 (0.00) (0.17) (0.18) 0.07 0.02 $ 0.08 $ 0.04 $ 0.01 $ 0.03 $ (0.17) $ (0.28) $ (0.21) (0.21) 0.03 0.01 0.01 (0.28) 0.01 (0.17) 0.01 0.01 0.01 0.04 0.01 0.08 0.01 High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.46 2.82 6.53 3.33 7.45 5.86 8.09 6.79 7.62 5.12 7.76 6.12 9.33 6.55 8.05 5.33 (1) Quarterly amounts may not add to year-to-date amounts due to rounding. (2) High and low market prices are based on intraday sales prices. (3) Includes goodwill impairment of $253 million in non-interest expense from continuing operations. Discontinued operations includes goodwill impairment of $478 million, net of a $14 million income tax benefit. 121 Item 8. Financial Statements and Supplementary Data REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING We, as members of the Management of Regions Financial Corporation (the “Company”), are responsible for establishing and maintaining effective internal control over financial reporting. Regions’ internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of the Company’s financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes self- monitoring mechanisms, and actions are taken to correct deficiencies as they are identified. All internal controls systems, no matter how well designed, have inherent limitations and may not prevent or detect misstatements in the Company’s financial statements, including the possibility of circumvention or overriding of controls. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Regions’ management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its Internal Control—Integrated Framework. Based on our assessment, we believe and assert that, as of December 31, 2011, the Company’s internal control over financial reporting is effective based on those criteria. Regions’ independent registered public accounting firm has issued an audit report on the effectiveness of the Company’s internal control over financial reporting. This report appears on the following page. REGIONS FINANCIAL CORPORATION by by /S/ O. B. GRAYSON HALL, JR. O. B. Grayson Hall, Jr. President and Chief Executive Officer /S/ DAVID J. TURNER, JR. David J. Turner, Jr. Chief Financial Officer 122 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM THE BOARD OF DIRECTORS AND STOCKHOLDERS OF REGIONS FINANCIAL CORPORATION We have audited Regions Financial Corporation’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Regions Financial Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Regions Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Regions Financial Corporation and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011 of Regions Financial Corporation and our report dated February 24, 2012, expressed an unqualified opinion thereon. Birmingham, Alabama February 24, 2012 123 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM THE BOARD OF DIRECTORS AND STOCKHOLDERS OF REGIONS FINANCIAL CORPORATION We have audited the accompanying consolidated balance sheets of Regions Financial Corporation and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Regions Financial Corporation and subsidiaries at December 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Regions Financial Corporation’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2012, expressed an unqualified opinion thereon. Birmingham, Alabama February 24, 2012 124 REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Assets Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest-bearing deposits in other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal funds sold and securities purchased under agreements to resell . . . . . . . . . . . . . . . . Trading account assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities held to maturity (estimated fair value of $17 and $26, respectively) . . . . . . . . . . Loans held for sale (includes $844 and $1,174 measured at fair value, respectively) . . . . . . Loans, net of unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premises and equipment, net Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits: Liabilities and Stockholders’ Equity December 31 2011 2010 (In millions, except share data) $ 2,132 4,913 200 1,266 24,471 16 1,193 77,594 (2,745) 74,849 1,085 2,375 361 4,816 182 449 8,742 $127,050 $ 1,643 4,880 396 1,116 23,289 24 1,485 82,864 (3,185) 79,679 1,219 2,569 421 5,561 267 385 9,417 $132,351 Non-interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,266 67,361 95,627 $ 25,733 68,881 94,614 Borrowed funds: Short-term borrowings: Federal funds purchased and securities sold under agreements to repurchase . . . . Other short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,333 734 3,067 8,110 11,177 3,747 110,551 2,716 1,221 3,937 13,190 17,127 3,876 115,617 Stockholders’ equity: Preferred stock, authorized 10 million shares Series A, cumulative perpetual participating, par value $1.00 (liquidation preference $1,000.00) per share, net of discount; Issued—3,500,000 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,419 3,380 Common stock, par value $.01 per share: Authorized 3 billion shares Issued including treasury stock—1,301,230,838 and 1,299,000,755 shares, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treasury stock, at cost—42,414,444 and 42,764,258 shares, respectively . . . . . . . . . . Accumulated other comprehensive income (loss), net . . . . . . . . . . . . . . . . . . . . . . . . . . Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 19,060 (4,527) (1,397) (69) 16,499 $127,050 13 19,050 (4,047) (1,402) (260) 16,734 $132,351 See notes to consolidated financial statements. 125 REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31 2011 2010 (In millions, except per share data) 2009 $3,444 $3,705 $ 4,199 Interest income on: Loans, including fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities: Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading account assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 758 — 758 36 1 13 873 1 874 39 4 15 Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,252 4,637 Interest expense on: Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income (loss) after provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-interest income: Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital markets and investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trust department income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leveraged lease termination gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-interest expense: Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and equipment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other-than-temporary impairments(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 472 (1) 371 842 3,410 1,530 1,880 1,168 64 220 199 112 8 372 2,143 1,604 388 275 2 253 — 1,340 3,862 755 4 489 1,248 3,389 2,863 526 1,174 69 247 196 394 78 331 2,489 1,640 411 277 2 — 75 1,454 3,859 966 19 985 55 22 16 5,277 1,277 44 663 1,984 3,293 3,541 (248) 1,156 39 259 191 69 587 464 2,765 1,635 422 281 75 — — 1,372 3,785 Income (loss) from continuing operations before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 (28) (844) (376) (1,268) (194) Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discontinued operations: Income (loss) from discontinued operations before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) from discontinued operations, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 189 $ (468) $(1,074) (408) (4) (404) $ (215) (41) 30 (71) $ (539) 66 23 43 $(1,031) Net income (loss) from continuing operations available to common shareholders . . . . . . . . . . . . . . . . . . . $ (25) $ (692) $(1,304) Net income (loss) available to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (429) $ (763) $(1,261) Weighted-average number of shares outstanding: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,258 1,258 Earnings (loss) per common share from continuing operations: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.02) (0.02) Earnings (loss) per common share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends declared per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.34) (0.34) 0.04 1,227 1,227 $ (0.56) (0.56) $ (0.62) (0.62) 0.04 989 989 $ (1.32) (1.32) $ (1.27) (1.27) 0.13 (1) Includes $266 million for the year ended December 31, 2009, of gross charges, net of $191 million of non-credit portion reported in other comprehensive income (loss). The corresponding 2010 and 2011 amounts are immaterial. See notes to consolidated financial statements. 126 REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY Preferred Stock Common Stock Shares Amount Shares Amount Additional Paid-In Capital Retained Earnings (Deficit) Treasury Stock, At Cost Accumulated Other Comprehensive Income (Loss) Total 4 $3,307 691 $ 7 $16,815 $(1,869) $(1,425) $ (22) $16,813 (In millions, except share and per share data) BALANCE AT JANUARY 1, 2009 . . . . . . . Comprehensive income (loss): — — — — (1,031) — — (1,031) Net income (loss) Net change in unrealized gains and . . . . . . . . . . . . . . . . . . — losses on securities available for sale, net of tax and reclassification adjustment(1) . . . . . . . . . . . . . . . . . . . . — Net change in unrealized gains and losses on derivative instruments, net of tax and reclassification adjustment(1) . . . . . . . . . . . . . . . . . . . . — Net change from defined benefit pension plans, net of tax(1) . . . . . . . . . . . . . . . . — Comprehensive income (loss) . . . . . . . . . . . . . Cash dividends declared — $0.13 per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Preferred dividends . . . . . . . . . . . . . . . . . . . . . — Preferred stock transactions: Net proceeds from issuance of 287,500 shares of mandatorily convertible preferred stock . . . . . . . . . . . . . . . . . . . — Discount accretion . . . . . . . . . . . . . . . . . . — Conversion of Series B shares . . . . . . . . . — Common stock transactions: Net proceeds from issuance of 460 million shares of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . — Issuance of 33 million shares of common stock issued in connection with early extinguishment of debt . . . . . . . . . . . . — Conversion of Series B shares . . . . . . . . . — Impact of stock transactions under compensation plans, net . . . . . . . . . . . — BALANCE AT DECEMBER 31, 2009 . . . . Comprehensive income (loss): Net income (loss) Net change in unrealized gains and . . . . . . . . . . . . . . . . . . — losses on securities available for sale, net of tax and reclassification adjustment(1) . . . . . . . . . . . . . . . . . . . . — Net change in unrealized gains and losses on derivative instruments, net of tax and reclassification adjustment(1) . . . . . . . . . . . . . . . . . . . . — Net change from defined benefit pension plans, net of tax(1) . . . . . . . . . . . . . . . . — Comprehensive income (loss) . . . . . . . . . . . . . Cash dividends declared — $0.04 per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Preferred dividends . . . . . . . . . . . . . . . . . . . . . — Preferred stock transactions: Conversion of mandatorily convertible preferred stock into 63 million shares of common stock . . . . . . . . . . . . . . . . . — Discount accretion . . . . . . . . . . . . . . . . . . — Common stock transactions: Impact of stock transactions under — — — — — — — — — — — 278 — 36 — (19) — — — — — — — — — — — — — — — — — — — — 460 5 1,764 33 — 5 — 4 — 135 19 48 — — — (105) (194) — (36) — — — — — — — — — — — — — — — — 16 4 3,602 1,193 12 18,781 (3,235) (1,409) — — — — (539) — — — — — — — — — — — — — — — — (259) 63 37 — 1 — — — — — 3 258 — — — — (49) (187) — (37) — — — — — — — 277 277 (133) 8 — — — — — — — — — 130 — (133) 8 (879) (105) (194) 278 — (19) 1,769 135 19 64 17,881 (539) (194) (194) (166) (30) — — — — — (166) (30) (929) (49) (184) — — 15 compensation plans, net . . . . . . . . . . . — — — — 8 — 7 BALANCE AT DECEMBER 31, 2010 . . . . 4 $3,380 1,256 $ 13 $19,050 $(4,047) $(1,402) $(260) $16,734 127 REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY—Continued Preferred Stock Common Stock Shares Amount Shares Amount Additional Paid-In Capital Retained Earnings (Deficit) Treasury Stock, At Cost Accumulated Other Comprehensive Income (Loss) Total (In millions, except share and per share data) Comprehensive income (loss): Net income (loss) Net change in unrealized gains and . . . . . . . . . . . . . . . . . . — $ — — $— $ — $ (215) $ — $ — $ (215) losses on securities available for sale, net of tax and reclassification adjustment(1) . . . . . . . . . . . . . . . . . . . . — Net change in unrealized gains and losses on derivative instruments, net of tax and reclassification adjustment(1) . . . . . . . . . . . . . . . . . . . . — Net change from defined benefit pension plans, net of tax(1) . . . . . . . . . . . . . . . . — Comprehensive income (loss) . . . . . . . . . . . . . Cash dividends declared — $0.04 per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Preferred dividends . . . . . . . . . . . . . . . . . . . . . — Preferred stock transactions: Discount accretion . . . . . . . . . . . . . . . . . . — Common stock transactions: Impact of stock transactions under — — — — — — — — — — — 39 — — — — — — — — — — — — — — — (51) (175) (39) — — — — — — compensation plans, net . . . . . . . . . . . — — 3 — 10 — 5 244 244 94 (147) — — — — 94 (147) (24) (51) (175) — 15 BALANCE AT DECEMBER 31, 2011 . . . . 4 $3,419 1,259 $ 13 $19,060 $(4,527) $(1,397) $ (69) $16,499 (1) See disclosure of reclassification adjustment amount and tax effect, as applicable, in Note 14 to the consolidated financial statements. See notes to consolidated financial statements. 128 REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 2011 2010 (In millions) 2009 Operating activities: Net income (loss) Adjustments to reconcile net cash provided by operating activities: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (215) $ (539) $ (1,031) Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment of goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization of premises and equipment . . . . . . . . . . . . . Provision for losses on other real estate, net . . . . . . . . . . . . . . . . . . . . . . . . . Net amortization of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net amortization of loans and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . Net amortization (accretion) of borrowings . . . . . . . . . . . . . . . . . . . . . . . . . Net securities gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss (gain) on early extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other-than-temporary impairments, net Deferred income tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Originations and purchases of loans held for sale . . . . . . . . . . . . . . . . . . . . . Proceeds from sales of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sale of loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation charges on loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . Branch consolidation and property and equipment charges . . . . . . . . . . . . . (Increase) decrease in trading account assets . . . . . . . . . . . . . . . . . . . . . . . . Decrease (increase) in other interest-earning assets . . . . . . . . . . . . . . . . . . . Decrease (increase) in interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . Decrease (increase) in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Decrease) increase in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,530 745 269 124 213 196 5 (112) — 2 (23) (3,460) 4,767 (89) 15 75 (150) 134 60 1,107 (366) (74) 4,753 2,863 — 284 168 220 233 (5) (394) 108 2 (210) (5,148) 5,875 (107) 45 — 1,923 (485) 47 (876) 224 (1) 4,227 3,541 — 284 142 10 252 (19) (69) (61) 75 245 (7,409) 7,650 (96) 25 — (1,989) 163 (10) 462 (90) (38) 2,037 Investing activities: Proceeds from sales of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . Proceeds from maturities of securities available for sale . . . . . . . . . . . . . . . . . . . Proceeds from maturities of securities held to maturity . . . . . . . . . . . . . . . . . . . . Purchases of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sales of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net decrease in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net purchases of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash received from deposits assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash from investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing activities: Net increase (decrease) in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net (decrease) increase in short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments on long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net proceeds from issuance of mandatorily convertible preferred stock . . . . . . . Net proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends on preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash from financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,859 5,848 9 (14,592) 1,488 (1,884) 2,132 (201) — 659 1,013 (870) 1,001 (6,004) — — (51) (175) (5,086) 326 6,919 $ 7,245 10,340 8,012 6 (17,701) 2,233 (99) 1,484 (191) — 4,084 (4,066) 269 3,743 (9,116) — — (49) (184) (9,403) (1,092) 8,011 $ 6,919 5,451 5,405 17 (15,646) 645 — 2,443 (234) 279 (1,640) 7,501 (12,154) 2,792 (3,246) 278 1,769 (105) (194) (3,359) (2,962) 10,973 $ 8,011 See notes to consolidated financial statements. 129 REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Regions Financial Corporation (“Regions” or “the Company”) provides a full range of banking and bank- related services to individual and corporate customers through its subsidiaries and branch offices located primarily in Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Mississippi, Missouri, North Carolina, South Carolina, Tennessee, Texas and Virginia. The Company is subject to competition from other financial institutions, is subject to the regulations of certain government agencies and undergoes periodic examinations by those regulatory authorities. The accounting and reporting policies of Regions and the methods of applying those policies that materially affect the accompanying consolidated financial statements conform with accounting principles generally accepted in the United States (“GAAP”) and with general financial services industry practices. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet dates and revenues and expenses for the periods presented. Actual results could differ from the estimates and assumptions used in the consolidated financial statements including, but not limited to, the estimates and assumptions related to the allowance for credit losses, intangibles, mortgage servicing rights and income taxes. Regions has evaluated all subsequent events for potential recognition and disclosure through the filing date of this Form 10-K. See Note 25. Certain amounts in prior period financial statements have been reclassified to conform to current period presentation, except as otherwise noted. These reclassifications are immaterial and have no effect on net income (loss), total assets or stockholders’ equity. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Regions, its subsidiaries and certain variable interest entities (“VIEs”). Significant intercompany balances and transactions have been eliminated. Regions considers a voting rights entity to be a subsidiary and consolidates it if Regions has a controlling financial interest in the entity. VIEs are consolidated if Regions has the power to direct the significant activities of the VIE that impact financial performance and has the obligation to absorb losses or the right to receive benefits that could potentially be significant (i.e., Regions is considered to be the primary beneficiary). Unconsolidated investments in voting rights entities or VIEs in which Regions has significant influence over operating and financing decisions (usually defined as a voting or economic interest of 20 percent to 50 percent) are accounted for using the equity method. Unconsolidated investments in voting rights entities or VIEs in which Regions has a voting or economic interest of less than 20 percent are generally carried at cost. See Note 2 for further discussion of VIEs. DISCONTINUED OPERATIONS On January 11, 2012, Regions entered into an agreement to sell Morgan Keegan & Company, Inc. and related affiliates. Results of operations for the entities being sold are presented separately as discontinued operations for all periods presented on the consolidated statements of operations because the pending sale met all of the criteria for reporting as discontinued operations at December 31, 2011. See Note 3 and Note 25 for further discussion. 130 CASH EQUIVALENTS AND CASH FLOWS Cash equivalents include cash and due from banks, interest-bearing deposits in other banks, and federal funds sold and securities purchased under agreements to resell. Cash flows from loans, either originated or acquired, are classified at that time according to management’s original intent to either sell or hold the loan for the foreseeable future. When management’s intent is to sell the loan, the cash flows of that loan are presented as operating cash flows. When management’s intent is to hold the loan for the foreseeable future, the cash flows of that loan are presented as investing cash flows. The following table summarizes supplemental cash flow information for the years ended December 31: Cash paid (received) during the period for: Interest on deposits and borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $919 (98) $1,442 (555) $2,086 137 Non-cash transfers: Loans held for sale and loans transferred to other real estate . . . . . . . . . . . . . . . Loans transferred to loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties transferred to held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 532 973 51 649 594 6 890 374 68 2011 2010 2009 (In millions) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities purchased under agreements to resell and securities sold under agreements to repurchase are treated as collateralized financing transactions. It is Regions’ policy to take possession of securities purchased under resell agreements. TRADING ACCOUNT ASSETS Trading account assets, which are primarily held for the purpose of selling at a profit, consist of debt and marketable equity securities and are carried at estimated fair value. The majority of the amounts in trading account assets are related to the activities of Morgan Keegan (see Note 3 and Note 25). See the “Fair Value Measurements” section below for discussion of determining fair value. Gains and losses, both realized and unrealized, related to Morgan Keegan activities are included in discontinued operations. Gains and losses, both realized and unrealized, related to continuing operations are included in capital markets and investment income. See Note 4 for further detail of trading account assets. SECURITIES Management determines the appropriate classification of debt and equity securities at the time of purchase and periodically re-evaluates such designations. Debt securities are classified as securities held to maturity when the Company has the intent and ability to hold the securities to maturity. Securities held to maturity are presented at amortized cost. Debt securities not classified as securities held to maturity or trading account assets and marketable equity securities not classified as trading account assets are classified as securities available for sale. Securities available for sale are presented at estimated fair value with changes in unrealized gains and losses, net of taxes, reported as a component of other comprehensive income (loss). See the “Fair Value Measurements” section below for discussion of determining fair value. The amortized cost of debt securities classified as securities held to maturity and securities available for sale is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage- backed securities, over the estimated life of the security, using the effective yield method. Such amortization or accretion is included in interest income on securities. Realized gains and losses are included in net securities gains (losses). The cost of securities sold is based on the specific identification method. 131 The Company reviews its securities portfolio on a regular basis to determine if there are any conditions indicating that a security has other-than-temporary impairment. Factors considered in this determination include the length of time and the extent to which the market value has been below cost, the credit standing of the issuer, Regions’ intent to sell and whether it is more likely than not that the Company will have to sell the security before its market value recovers. Activity related to the credit loss component of other-than-temporary impairment is recognized in non-interest expense. For debt securities, the portion of other-than-temporary impairment related to all factors other than credit is recognized in other comprehensive income. See Note 4 for discussion and details of other-than-temporary impairment. LOANS HELD FOR SALE At December 31, 2011 and 2010, loans held for sale included commercial loans, investor real estate loans and residential real estate mortgage loans. Commercial and investor real estate loans held for sale consist of certain non-performing loans for which management has the intent to sell in the near term. Regions classifies new 15 and 30-year conforming residential real estate mortgage loans as held for sale based on intent, which is determined when Regions enters into an interest rate lock commitment on this loan type. Regions has elected the fair value option for residential mortgage loans held for sale. Residential real estate mortgage loans not designated as held for sale are retained based on available liquidity, interest rate risk management and other business purposes. Commercial and investor real estate loans held for sale are carried at the lower of cost or estimated fair value. See the “Fair Value Measurements” section below for discussion of determining fair value. Gains and losses of non-performing commercial and investor real estate are included in other non-interest expense as such amounts are viewed as credit costs. Gains and losses on residential mortgage loans held for sale for which the fair value option has been elected are included in mortgage income. LOANS Loans are carried at the principal amount outstanding, net of premiums, discounts, unearned income and deferred loan fees and costs. Interest income on loans is accrued based on the contractual interest rate and the principal amount outstanding, except for those loans classified as non-accrual. Premiums and discounts on purchased loans and non-refundable loan origination and commitment fees, net of direct costs of originating or acquiring loans, are deferred and recognized over the estimated lives of the related loans as an adjustment to the loans’ effective yield, which is included in interest income on loans. See Note 5 for further detail and information on loans. Regions engages in both direct and leveraged lease financing. The net investment in direct financing leases is the sum of all minimum lease payments and estimated residual values, less unearned income. Unearned income is recognized over the terms of the leases to produce a level yield. The net investment in leveraged leases is the sum of all lease payments (less non-recourse debt payments), plus estimated residual values, less unearned income. Income from leveraged leases is recognized over the term of the leases based on the unrecovered equity investment. Commercial and investor real estate loans are placed on non-accrual if any of the following conditions occur: 1) collection in full of contractual principal and interest is no longer reasonably assured (even if current as to payment status), 2) a partial charge-off has occurred, unless the loan has been brought current under its contractual terms (original or restructured terms) and the full originally contracted principal and interest is considered to be fully collectible, or 3) the loan is delinquent on any principal or interest for 90 days or more unless the obligation is secured by collateral having a realizable value sufficient to fully discharge the obligation and the loan is in the legal process of collection. Factors considered regarding full collection include assessment of changes in borrower’s cash flow, valuation of underlying collateral, ability and willingness of guarantors to provide credit support, and other conditions. Charge-offs on commercial and investor real estate loans are primarily based on the facts and circumstances of the individual loan and occur when available information confirms the loan is not fully collectible and the loss 132 is reasonably quantifiable. Factors considered in making these determinations are the borrower’s and any guarantor’s ability and willingness to pay, the status of the account in bankruptcy court (if applicable), and collateral value. Commercial and investor real estate loan relationships of $250,000 or less are subject to charge-off or charge down to estimated value less costs to sell at 180 days past due, based on collateral value. Non-accrual and charge-off decisions for consumer loans are dictated by the Federal Financial Institutions Examination Council’s (FFEIC) Uniform Retail Credit Classification and Account Management Policy which establishes standards for the classification and treatment of consumer loans. Non-accrual status is driven by the charge-off process as follows. If a consumer loan secured by real estate in a first lien position (residential first mortgage or home equity) becomes 180 days past due, Regions evaluates the loan for non-accrual status and potential charge-off based on net loan to value exposure. For home equity loans in a second lien position, the analysis is performed at 120 days past due. If a loan is secured by collateral having a realizable value sufficient to fully discharge the obligation, then a partial write-down is not necessary and the loan remains on accrual status, provided it is in the process of legal collection. If a partial charge-off is necessary as a result of the evaluation, then the remaining balance is placed on non-accrual. Consumer loans not secured by real estate are either 1) charged-off in full at 120 days past due for closed-end loans, 180 days past due for open-end loans other than credit cards or the end of the month in which the loan becomes 180 days past due for credit cards, or 2) partially written down to estimated collateral value less estimated costs to sell no later than 120 days past due for home equity second liens or at 180 days past due for residential and home equity first liens. When a commercial or investor real estate loan is placed on non-accrual status, uncollected interest accrued in the current year is reversed and charged to interest income. Uncollected interest accrued from prior years on commercial and investor real estate loans placed on non-accrual status in the current year is charged against the allowance for loan losses. When a consumer loan is placed on non-accrual status, all uncollected interest accrued is reversed and charged to interest income due to immateriality. Interest collections on non-accrual loans are applied as principal reductions. Regions determines past due or delinquency status of a loan based on contractual payment terms. All loans on non-accrual status may be returned to accrual status and interest accrual resumed if both of the following conditions are met: 1) the loan is brought contractually current as to both principal and interest, and 2) future payments are reasonably expected to continue being received in accordance with the terms of the loan and repayment ability can be reasonably demonstrated. ALLOWANCE FOR CREDIT LOSSES Through provisions charged directly to expense, Regions has established an allowance for credit losses (“allowance”). This allowance is comprised of two components: the allowance for loan and lease losses, which is a contra-asset to loans, and a reserve for unfunded credit commitments, which is recorded in other liabilities. The allowance is reduced by actual losses and increased by recoveries, if any. Regions charges losses against the allowance in the period the loss is confirmed. The allowance is maintained at a level believed appropriate by management to absorb probable losses inherent in the loan portfolio and in accordance with GAAP and regulatory guidelines. Management’s determination of the appropriateness of the allowance is a quarterly process and is based on an evaluation and rating of the loan portfolio segments, historical loan loss experience, current economic conditions, collateral values of properties securing loans, levels of problem loans, volume, growth, quality and composition of the loan portfolio segments, regulatory guidance, and other relevant factors. Changes in any of these, or other factors, or the availability of new information, could require that the allowance be adjusted in future periods. Actual losses could vary from management’s estimates. Management attributes portions of the allowance to loans that it evaluates and determines to be impaired and to groups of loans that it evaluates collectively. The remaining allowance is available to cover all charge-offs that arise from the loan portfolio. 133 Loans deemed to be impaired include non-accrual loans, excluding consumer loans, and troubled debt restructurings (“TDRs”). Impaired loans on non-accrual status with outstanding balances greater than or equal to $2.5 million are evaluated for impairment individually. For these loans, Regions measures the level of impairment based on the present value of the estimated projected cash flows, the estimated value of the collateral or, if available, the observable market price. Regions generally uses the estimated projected cash flow method to measure impairment. In determining the appropriate level of allowance for all other loans, including non-accrual loans less than $2.5 million and TDRs, management uses information to stratify the loan portfolio segments into loan pools with common risk characteristics. Classes in the commercial and investor real estate portfolio segments are disaggregated based upon underlying credit quality and probability of default. Classes in the consumer portfolio segment are disaggregated by product type. Certain portions of the allowance are attributed to loan pools based on various factors and analyses, including but not limited to, current and historical loss experience trends and levels of problem credits, current economic conditions, changes in product mix and underwriting. For consumer TDRs, Regions measures the level of impairment based on pools of loans stratified by common risk characteristics. All adjustments to the allowance for loan losses are recorded through the provision for loan losses. See Note 6 for additional information regarding the calculation of the allowance for loan losses. In order to estimate a reserve for unfunded commitments, Regions uses a process consistent with that used in developing the allowance for loan losses. Regions estimates future fundings, which are less than the total unfunded commitment amounts, based on historical funding experience. Allowance for loan loss factors, which are based on product and customer type and are consistent with the factors used for portfolio loans, are applied to these funding estimates to arrive at the reserve balance. Changes in the reserve for unfunded commitments are recognized in other non-interest expense. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation and amortization, as applicable. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the improvements (or the terms of the leases, if shorter). Generally, premises and leasehold improvements are depreciated or amortized over 7-40 years. Furniture and equipment are generally depreciated or amortized over 3-10 years. See Note 8 for detail of premises and equipment. Regions enters into lease transactions for the right to use assets. These leases vary in term and, from time to time, include incentives and/or rent escalations. Examples of incentives include periods of “free” rent and leasehold improvement incentives. Regions recognizes incentives and escalations on a straight-line basis over the lease term as a reduction of or increase to rent expense, as applicable, in net occupancy expense in the consolidated statements of operations. INTANGIBLE ASSETS Intangible assets include goodwill, which is the excess of cost over the fair value of net assets of acquired businesses, and other identifiable intangible assets. Other identifiable intangible assets include the following: 1) core deposit intangible assets, which are amounts recorded related to the value of acquired indeterminate- maturity deposits, 2) amounts capitalized related to the value of acquired customer relationships and 3) amounts recorded related to employment agreements with certain individuals of acquired entities. Core deposit intangibles and most other identifiable intangibles are amortized on an accelerated basis over their expected useful lives. The Company’s goodwill is tested for impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment. Regions assesses the following indicators of goodwill impairment for each reporting period: • Recent operating performance, 134 • Changes in market capitalization, • Regulatory actions and assessments, • Changes in the business climate (including legislation, legal factors and competition), • Company-specific factors (including changes in key personnel, asset impairments, and business dispositions), and • Trends in the banking industry. Adverse changes in the economic environment, declining operations, or other factors could result in a decline in the implied fair value of goodwill. A goodwill impairment test includes two steps. Step One, used to identify potential impairment, compares the estimated fair value of a reporting unit with its carrying amount, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. Step Two of the goodwill impairment test compares the implied estimated fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of goodwill for that reporting unit exceeds the implied fair value of that unit’s goodwill, an impairment loss is recognized in other non-interest expense in an amount equal to that excess. For purposes of performing Step One of the goodwill impairment test, Regions uses both the income and market approaches to value its reporting units. Regions uses the output from these approaches to determine estimated fair value of the reporting unit. The income approach, which is the primary valuation approach, consists of discounting projected long-term future cash flows, which are derived from internal forecasts and economic expectations for the respective reporting units. The projected future cash flows are discounted using cost of capital metrics for Regions’ peer group or a build-up approach (such as the capital asset pricing model) applicable to each reporting unit. The significant inputs to the income approach include expected future cash flows, which are primarily driven by the long-term target tangible equity to tangible assets ratio, and the discount rate, which is determined in the build-up approach using the risk-free rate of return, adjusted equity beta, equity risk premium, and a company-specific risk factor. The company-specific risk factor is used to address the uncertainty of growth estimates and earnings projections of management. Regions uses the public company method and the transaction method as the two market approaches. The public company method applies a value multiplier derived from each reporting unit’s peer group to a financial metric of the reporting unit (e.g. last twelve months of earnings before interest, taxes and depreciation, tangible book value, etc.) and an implied control premium to the respective reporting unit. The control premium is evaluated and compared to similar financial services transactions. The transaction method applies a value multiplier to a financial metric of the reporting unit based on comparable observed purchase transactions in the financial services industry for the reporting unit (where available). For purposes of performing Step Two of the goodwill impairment test, if applicable, Regions compares the implied estimated fair value of the reporting unit goodwill with the carrying amount of that goodwill. In order to determine the implied estimated fair value, a full purchase price allocation would be performed in the same manner as if a business combination had occurred. As part of the Step Two analysis, Regions estimates the fair value of all of the assets and liabilities of the reporting unit, including unrecognized assets and liabilities. The related valuation methodologies for certain material financial assets and liabilities are discussed in the “Fair Value Measurements” section below. Other identifiable intangible assets are reviewed at least annually for events or circumstances that could impact the recoverability of the intangible asset. These events could include loss of core deposits, increased competition or adverse changes in the economy. To the extent other identifiable intangible assets are deemed unrecoverable, impairment losses are recorded in other non-interest expense to reduce the carrying amount. 135 Refer to Note 9 for further discussion of the results of the goodwill and other identifiable intangibles impairment tests. ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS Regions accounts for transfers of financial assets as sales when control over the transferred assets is surrendered. Control is generally considered to have been surrendered when 1) the transferred assets are legally isolated from the Company or its consolidated affiliates, even in bankruptcy or other receivership, 2) the transferee has the right to pledge or exchange the assets with no conditions that constrain the transferee and provide more than a trivial benefit to the Company, and 3) the Company does not maintain the obligation or unilateral ability to reclaim or repurchase the assets. If these sale criteria are met, the transferred assets are removed from the Company’s balance sheet and a gain or loss on sale is recognized. If not met, the transfer is recorded as a secured borrowing, and the assets remain on the Company’s balance sheet, the proceeds from the transaction are recognized as a liability, and gain or loss on sale is deferred until the sale criterion are achieved. Regions has elected to account for its servicing assets using the fair value measurement method. Under the fair value measurement method, servicing assets are measured at fair value each period with changes in fair value recorded as a component of mortgage income. Additionally, during the third quarter of 2009, Regions adopted an option-adjusted spread (“OAS”) valuation approach. The OAS represents the average spread over the LIBOR swap curve that equates the asset’s discounted cash flows to its market price. The fair value of mortgage servicing rights is calculated using various assumptions including future cash flows, market discount rates, expected prepayment rates, servicing costs and other factors. A significant change in prepayments of mortgages in the servicing portfolio could result in significant changes in the valuation adjustments, thus creating potential volatility in the carrying amount of mortgage servicing rights. See the “Fair Value Measurements” section below for additional discussion regarding determination of fair value. Refer to Note 7 for further information on servicing of financial assets. FORECLOSED PROPERTY AND OTHER REAL ESTATE Other real estate and certain other assets acquired in satisfaction of indebtedness (“foreclosure”) are carried in other assets at the lower of the recorded investment in the loan or fair value less estimated costs to sell the property. At the date of transfer, when the recorded investment in the loan exceeds the property’s estimated fair value less costs to sell, write-downs are recorded as estimated charge-offs against the allowance. Regions allows a period of up to 60 days after the date of transfer to record finalized write-downs as charge-offs against the allowance in order to properly accumulate all related invoices and updated valuation information, if necessary. Subsequent to transfer, Regions obtains valuations from professional valuation experts and/or third party appraisers on at least an annual basis. See the “Fair Value Measurements” section below for additional discussion regarding determination of fair value. Subsequent to transfer and the additional 60 days, any further write-downs are recorded as other non-interest expense. Gain or loss on the sale of foreclosed property and other real estate is included in other non-interest expense. From time to time, assets classified as premises and equipment are transferred to held for sale for various reasons. These assets are carried in other assets at the lower of the recorded investment in the asset or fair value less estimated cost to sell based upon the property’s appraised value at the date of transfer. Any write-downs of property held for sale are recorded as other non-interest expense. At December 31, 2011 and 2010, the carrying values of premises and equipment held for sale were approximately $33 million and $28 million, respectively. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES The Company enters into derivative financial instruments to manage interest rate risk, facilitate asset/ liability management strategies and manage other exposures. These instruments primarily include interest rate 136 swaps, options on interest rate swaps, interest rate caps and floors, Eurodollar futures, forward rate contracts and forward sale commitments. All derivative financial instruments are recognized on the consolidated balance sheets as other assets or other liabilities, as applicable, at estimated fair value. Regions enters into master netting agreements with counterparties and/or requires collateral to cover exposures. In at least some cases, counterparties post at a zero threshold regardless of rating. Interest rate swaps are agreements to exchange interest payments based upon notional amounts. Interest rate swaps subject Regions to market risk associated with changes in interest rates, as well as the credit risk that the counterparty will fail to perform. Option contracts involve rights to buy or sell financial instruments on a specified date or over a period at a specified price. These rights do not have to be exercised. Some option contracts such as interest rate floors, involve the exchange of cash based on changes in specified indices. Interest rate floors are contracts to hedge interest rate declines based on a notional amount. Interest rate floors subject Regions to market risk associated with changes in interest rates, as well as the credit risk that the counterparty will fail to perform. Forward rate contracts are commitments to buy or sell financial instruments at a future date at a specified price or yield. Regions primarily enters into forward rate contracts on marketable instruments, which expose Regions to market risk associated with changes in the value of the underlying financial instrument, as well as the credit risk that the counterparty will fail to perform. Eurodollar futures are futures contracts on Eurodollar deposits. Eurodollar futures 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. Derivative financial instruments that qualify for hedge accounting are designated, based on the exposure being hedged, as either fair value or cash flow hedges. Fair value hedge relationships mitigate exposure to the change in fair value of an asset, liability or firm commitment. Under the fair value hedging model, gains or losses attributable to the change in fair value of the derivative instrument, as well as the gains and losses attributable to the change in fair value of the hedged item, are recognized in other non-interest expense in the period in which the change in fair value occurs. Hedge ineffectiveness is recognized as other non-interest expense to the extent the changes in fair value of the derivative do not offset the changes in fair value of the hedged item. The corresponding adjustment to the hedged asset or liability is included in the basis of the hedged item, while the corresponding change in the fair value of the derivative instrument is recorded as an adjustment to other assets or other liabilities, as applicable. Cash flow hedge relationships mitigate exposure to the variability of future cash flows or other forecasted transactions. For cash flow hedge relationships, the effective portion of the gain or loss related to the derivative instrument is recognized as a component of other comprehensive income. The ineffective portion of the gain or loss related to the derivative instrument, if any, is recognized in earnings as other non-interest expense during the period of change. Amounts recorded in other comprehensive income are recognized in earnings in the period or periods during which the hedged item impacts earnings. The Company formally documents all hedging relationships between hedging instruments and the hedged items, as well as its risk management objective and strategy for entering into various hedge transactions. The Company performs periodic assessments to determine whether the hedging relationship has been highly effective in offsetting changes in fair values or cash flows of hedged items and whether the relationship is expected to continue to be highly effective in the future. When a hedge is terminated or hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, or because it is probable that the forecasted transaction will not occur by the end of the specified time period, the derivative will continue to be recorded as an other asset or other liability in the consolidated balance sheets at its estimated fair value, with changes in fair value recognized in capital markets and investment income. Any asset or liability that was recorded pursuant to recognition of the firm commitment is removed from the consolidated balance sheets and recognized in other non-interest expense. Gains and losses that were unrecognized and accumulated in other comprehensive income pursuant to the hedge of a forecasted transaction are recognized immediately in other non-interest expense. 137 Derivative contracts related to continuing operations that do not qualify for hedge accounting are classified as trading assets or liabilities with gains and losses related to the change in fair value recognized in capital markets and investment income or mortgage income, as applicable, in the statements of operations during the period. Derivative contracts related to Morgan Keegan activities are included in discontinued operations. These positions are used to mitigate economic and accounting volatility related to customer derivative transactions, as well as non-derivative instruments. Regions enters into interest rate lock commitments, which are commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. Accordingly, such commitments are recorded at estimated fair value with changes in fair value recorded in mortgage income. Regions also has corresponding forward sale commitments related to these interest rate lock commitments, which are recorded at fair value with changes in fair value recorded in mortgage income. See the “Fair Value Measurements” section below for additional information related to the valuation of interest rate lock commitments. Regions enters into various derivative agreements with customers desiring protection from possible future market fluctuations. Regions manages the market risk associated with these derivative agreements in a trading portfolio. The contracts in this portfolio do not qualify for hedge accounting and are marked-to-market through earnings and included in other assets and other liabilities. Concurrent with the election to use fair value measurement for mortgage servicing rights referred to above, Regions began using various derivative instruments to mitigate the impact of changes in the fair value of mortgage servicing rights in the statements of operations. The instruments are primarily forward rate commitments, but can include futures, swaps and swaptions. These derivatives are carried at fair value, with changes in fair value reported in mortgage income. Refer to Note 20 for further discussion and details of derivative financial instruments and hedging activities. INCOME TAXES The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for expected future tax consequences. Under this method, deferred tax assets and liabilities are determined by applying the federal and state tax rates to the differences between financial statement carrying amounts and the corresponding tax bases of assets and liabilities. Deferred tax assets are also recorded for any tax attributes, such as tax credit and net operating loss carryforwards. The net balance of deferred tax assets and liabilities is reported in other assets in the consolidated balance sheets. Any effect of a change in federal and state tax rates on deferred tax assets and liabilities is recognized in income tax expense in the period that includes the enactment date. The Company reflects the expected amount of income tax to be paid or refunded during the year as current income tax expense or benefit, as applicable. The Company evaluates the realization of deferred tax assets based on all positive and negative evidence available at the balance sheet date. Realization of deferred tax assets is based on the Company’s judgments, including taxable income within any applicable carryback periods, future projected taxable income, reversal of taxable temporary differences and other tax-planning strategies to maximize realization of the deferred tax assets. A valuation allowance is recorded for any deferred tax assets that are not more-likely-than-not to be realized. See Note 19 for additional discussion regarding income taxes. Income tax benefits generated from uncertain tax positions are accounted for using the recognition and cumulative-probability measurement thresholds. Based on the technical merits, if a tax benefit is not more-likely- than-not of being sustained upon examination, the Company records a liability for the recognized income tax benefit. If a tax benefit is more-likely-than-not of being sustained based on the technical merits, the Company utilizes the cumulative probability measurement and records an income tax benefit equivalent to the largest 138 amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with a taxing authority. The Company recognizes interest expense, interest income and penalties related to unrecognized tax benefits within current income tax expense. TREASURY STOCK The purchase of the Company’s common stock is recorded at cost. At the date of retirement or subsequent reissuance, treasury stock is reduced by the cost of such stock with differences recorded in additional paid-in capital or retained earnings, as applicable. SHARE-BASED PAYMENTS Compensation cost for share-based payments is measured based on the fair value of the award, which most commonly includes restricted stock (i.e., unvested common stock) and stock options, at the grant date and is recognized in the consolidated financial statements on a straight-line basis over the requisite service period for service-based awards. The fair value of restricted stock or restricted stock units is determined based on the closing price of Regions’ common stock on the date of grant. The fair value of stock options where vesting is based on service is estimated at the date of grant using a Black-Scholes option pricing model and related assumptions. Expected volatility considers implied volatility from traded options on the Company’s stock and, primarily, historical volatility of the Company’s stock. Regions considers historical data to estimate future option exercise behavior, which is used to derive an option’s expected term. The expected term represents the period of time that options are expected to be outstanding from the grant date. Historical data is also used to estimate future employee attrition, which is used to calculate an expected forfeiture rate. Groups of employees that have similar historical exercise behavior are reviewed and considered for valuation purposes. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant and the weighted-average expected life of the grant. Regions issues new common shares to settle stock options. Beginning in 2009, Regions issued restricted stock units payable solely in cash (“cash-settled RSUs”), which are accounted for as other liabilities in the consolidated balance sheets. The cash settled RSUs are subject to a vesting period ranging from two weeks to one year and, following the vesting period, are subject to transfer restrictions and a delayed payment, which can range from six months to two years. The grant date fair value of the award is determined in the same manner as other restricted stock awards and is charged to the statements of operations over the vesting period. Changes in Regions’ stock price over the delayed payment period are charged to the statements of operations. See Note 16 for further discussion and details of share-based payments. REVENUE RECOGNITION The largest source of revenue for Regions is interest income. Interest income is recognized on an accrual basis driven by nondiscretionary formulas based on written contracts, such as loan agreements or securities contracts. Credit-related fees, including letter of credit fees, finance charges and fees related to credit cards are recognized in non-interest income when earned. Regions recognizes commission revenue and brokerage, exchange and clearance fees on a trade-date basis. Other types of non-interest revenues, such as service charges on deposits, interchange income on credit cards and trust revenues, are accrued and recognized into income as services are provided and the amount of fees earned are reasonably determinable. PER SHARE AMOUNTS Earnings (loss) per common share computations are based upon the weighted-average number of shares outstanding during the period. Diluted earnings (loss) per common share computations are based upon the weighted- average number of shares outstanding during the period, plus the effect of outstanding stock options and stock performance awards if dilutive. The diluted earnings (loss) per common share computation also assumes conversion of any outstanding convertible preferred stock and warrants, unless such an assumed conversion would be antidilutive. Refer to Note 15 for additional information. 139 FAIR VALUE MEASUREMENTS Fair value guidance establishes a framework for using fair value to measure assets and liabilities and defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) as opposed to the price that would be paid to acquire the asset or received to assume the liability (an entry price). A fair value measure should reflect the assumptions that market participants would use in pricing the asset or liability, including the assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. Required disclosures include stratification of balance sheet amounts measured at fair value based on inputs the company uses to derive fair value measurements. These strata include: • Level 1 valuations, where the valuation is based on quoted market prices for identical assets or liabilities traded in active markets (which include exchanges and over-the-counter markets with sufficient volume), • Level 2 valuations, where the valuation is based on quoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market, and • Level 3 valuations, where the valuation is generated from model-based techniques that use significant assumptions not observable in the market, but observable based on Company-specific data. These unobservable assumptions reflect the Company’s own estimates for assumptions that market participants would use in pricing the asset or liability. Valuation techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability. ITEMS MEASURED AT FAIR VALUE ON A RECURRING BASIS Trading account assets, securities available for sale, certain mortgage loans held for sale, mortgage servicing rights, derivative assets, trading account liabilities and derivative liabilities are recorded at fair value on a recurring basis. Below is a description of valuation methodologies for these assets and liabilities. Trading account assets and liabilities and securities available for sale consist of U.S. Treasuries, obligations of states and political subdivisions, mortgage-backed securities (including agency securities), other debt securities and equity securities. • U.S. Treasuries are valued based on quoted market prices of identical assets on active exchanges (Level 1 measurements as described above) and also using data from third-party pricing services for similar securities as applicable. Pricing from these third party services is generally based on a market approach using observable inputs such as benchmark yields, reported trades, broker/dealer quotes, benchmark securities, bid and offers. These valuations are Level 2 measurements. • Mortgage-backed securities are valued primarily using data from third-party pricing services for similar securities as applicable. Pricing from these third-party services is generally based on a market approach using observable inputs such as benchmark yields, reported trades, broker/dealer quotes, benchmark securities, TBA prices, issuer spreads, bids and offers, monthly payment information, and collateral performance, as applicable. These valuations are Level 2 measurements. Where such comparable data is not available, the Company develops valuations based on assumptions that are not readily observable in the market place; these valuations are Level 3 measurements. • Obligations of states and political subdivisions are generally based on data from third-party pricing services. The valuations are based on a market approach using observable inputs such as benchmark yields, Municipal Securities Rulemaking Board (“MSRB”) reported trades, material event notices and new issue data. These valuations are Level 2 measurements. Where such comparable data is not available, the Company develops valuations based on assumptions that are not readily observable in the 140 market place; these valuations are Level 3 measurements. For example, auction-rate securities fall into this category. For these instruments, internal pricing models assume converting the securities into fixed-rate debt securities with similar credit ratings and maturity dates based on management’s estimates of the term of the securities. Assumed terms generally fall within a range of one to four years. • Other debt securities are valued based on Level 1, 2 and 3 measurements, depending on pricing methodology selected and are valued primarily using data from third-party pricing services. Pricing from these third-party pricing services is generally based on a market approach using observable inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids and offers, and Trade Reporting and Compliance Engine (“TRACE”) reported trades. • Equity securities are valued based on quoted market prices of identical assets on active exchanges; these valuations are Level 1 measurements. A portion of Regions’ trading account assets and the majority of trading liabilities and securities available for sale are valued using third-party pricing services. To validate pricing related to investment securities held in the trading account assets and liabilities portfolios, pricing received from third-party pricing services is compared to available market data for reasonableness and/or pricing information from other third-party pricing services. Insignificant pricing adjustments may be made by traders to individual securities based upon the trader’s opinion of value. When such adjustments are made, Regions classifies the measurement as a Level 3 measurement. To validate pricing related to liquid investment securities, which represent the vast majority of the available for sale portfolio (e.g., mortgage-backed securities), Regions compares price changes received from the pricing service to overall changes in market factors in order to validate the pricing received. To validate pricing received on less liquid investment securities in the available for sale portfolio, Regions receives pricing from third-party brokers/dealers on a sample of securities that are then compared to the pricing received. The pricing service uses standard observable inputs when available, for example: benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, and bids and offers, among others. For certain security types, additional inputs may be used, or some inputs may not be applicable. It is not customary for Regions to adjust the pricing received for the available for sale portfolio. In the event that prices are adjusted, Regions classifies the measurement as a Level 3 measurement. Mortgage loans held for sale consist of residential first mortgage loans held for sale that are valued based on traded market prices of similar assets where available and/or discounted cash flows at market interest rates, adjusted for securitization activities that include servicing value and market conditions, a Level 2 measurement. Regions has elected to measure certain mortgage loans held for sale at fair value by applying the fair value option (see additional discussion under the “Fair Value Option” section below). Mortgage servicing rights consist of residential mortgage servicing rights and are valued using an option- adjusted spread valuation approach, a Level 3 measurement. See Note 7 for information regarding the servicing of financial assets and additional details regarding the assumptions relevant to this valuation. Derivative assets and liabilities, which primarily consist of interest rate contracts that include futures, options and swaps, are included in other assets and other liabilities (as applicable) on the consolidated balance sheets. Interest rate swaps are predominantly traded in over-the-counter markets and, as such, values are determined using widely accepted discounted cash flow models, which are Level 2 measurements. These discounted cash flow models use projections of future cash payments/receipts that are discounted at mid-market rates. The assumed cash flows are sourced from an assumed yield curve, which is consistent with industry standards and conventions. These valuations are adjusted for the unsecured credit risk at the reporting date, which considers collateral posted and the impact of master netting agreements. For options and futures contracts traded in over-the-counter markets, values are determined using discounted cash flow analyses and option pricing models based on market rates and volatilities, which are Level 2 measurements. Interest rate lock commitments on loans intended for sale, treasury locks and credit derivatives are valued using option pricing models that incorporate significant unobservable inputs, and therefore are Level 3 measurements. 141 ITEMS MEASURED AT FAIR VALUE ON A NON-RECURRING BASIS From time to time, certain assets may be recorded at fair value on a non-recurring basis. These non-recurring fair value adjustments typically are a result of the application of lower of cost or fair value accounting or a write-down occurring during the period. For example, if the fair value of an asset in these categories falls below its cost basis, it is considered to be at fair value at the end of the period of the adjustment. In periods where there is no adjustment, the asset is generally not considered to be at fair value. The following is a description of the valuation methodologies used for certain assets that are recorded at fair value. Foreclosed property and other real estate is carried in other assets at the lower of the recorded investment in the loan or fair value less estimated costs to sell the property. The fair value for foreclosed property that is based on either observable transactions of similar instruments or formally committed sale prices is classified as a Level 2 measurement. If no formally committed sale price is available, Regions also obtains valuations from professional valuation experts and/or third party appraisers. Updated valuations are obtained on at least an annual basis. Foreclosed property exceeding established dollar thresholds is valued based on appraisals. Appraisals are performed by third-parties with appropriate professional certifications and conform to generally accepted appraisal standards as evidenced by the Uniform Standards of Professional Appraisal Practice. Regions’ policies related to appraisals conform to regulations established by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and other regulatory guidance. Professional valuations are considered Level 2 measurements because they are based largely on observable inputs. Regions has a centralized appraisal review function that is responsible for reviewing all appraisals for compliance with banking regulations and guidelines as well as appraisal standards. Based on these reviews, Regions may make adjustments to the market value conclusions determined in the appraisals of real estate (either as other real estate or loans held for sale) when the appraisal review function determines that the valuation is based on inappropriate assumptions or where the conclusion is not sufficiently supported by the market data presented in the appraisal. Adjustments to the market value conclusions are discussed with the professional valuation experts and/or third party appraisers; the magnitude of the adjustments that are not mutually agreed upon is insignificant. In either event, adjustments, if made, must be based on sufficient information available to support an alternate opinion of market value. An estimated standard discount factor, which is updated at least annually, is applied to the appraisal amount for certain commercial and investor real estate properties when the recorded investment in the loan is transferred into foreclosed property. Internally adjusted valuations are considered Level 3 measurements as management uses assumptions that may not be observable in the market. Loans held for sale for which the fair value option has not been elected are recorded at the lower of cost or fair value and therefore are reported at fair value on a non-recurring basis. The fair values for loans held for sale that are based on formally committed loan sale prices or valuations performed using observable inputs are classified as a Level 2 measurement. If no formally committed sales price is available, a professional valuation is obtained, consistent with the process described above for foreclosed property and other real estate. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating fair values of financial instruments that are not disclosed above: Cash and cash equivalents: The carrying amounts reported in the consolidated balance sheets and cash flows approximate the estimated fair values. Securities held to maturity: Estimated fair values are based on quoted market prices, where available. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable instruments and/or discounted cash flow analyses. Loans, (excluding leases), net of unearned income and allowance for loan losses: The fair values of loans, excluding leases, are estimated based on groupings of similar loans by type, interest rate, and borrower 142 creditworthiness. Discounted future cash flow analyses are performed for the groupings incorporating assumptions of current and projected prepayment speeds. Discount rates are determined using the Company’s current origination rates on similar loans, adjusted for changes in current liquidity and credit spreads (if necessary) observed in market pricing. Other interest-earning assets: The carrying amounts reported in the consolidated balance sheets approximate the estimated fair values. Deposits: The fair value of non-interest-bearing demand accounts, interest-bearing transaction accounts, savings accounts, money market accounts and certain other time deposit accounts is the amount payable on demand at the reporting date (i.e., the carrying amount). Fair values for certificates of deposit are estimated by using discounted cash flow analyses, based on market spreads to benchmark rates. Short-term and long-term borrowings: The carrying amounts of short-term borrowings reported in the consolidated balance sheets approximate the estimated fair values. The fair values of long-term borrowings are estimated using quoted market prices. If quoted market prices are not available, fair values are estimated using discounted future cash flow analyses based on current interest rates, liquidity and credit spreads. Loan commitments and letters of credit: The estimated fair values for these off-balance sheet instruments are based on probabilities of funding to project expected future cash flows, which are discounted using the loan methodology described above. The premium/discounts are adjusted for the time value of money over the average remaining life of the commitments and the opportunity cost associated with regulatory requirements. See Note 21 for additional information related to fair value measurements. RECENT ACCOUNTING PRONOUNCEMENTS AND ACCOUNTING CHANGES In April 2009, the FASB issued additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. Additionally, the guidance addresses circumstances that indicate a transaction is not orderly. The guidance emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. This guidance is effective for interim and annual reporting periods ending after June 15, 2009, and is applied prospectively. Regions adopted these provisions during the second quarter of 2009, and the effect of the adoption on the consolidated financial statements was not material. In April 2009, the FASB issued additional guidance modifying and expanding other-than-temporary impairment existing guidance for debt securities. This guidance addresses the unique features of debt securities and clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. Additionally, it requires an entity to recognize the credit component of an other- than-temporary impairment of a debt security in earnings and the noncredit component in other comprehensive income when the entity does not intend to sell the security and it is more likely than not that the entity will not be required to sell the security prior to recovery. The guidance also expands and increases the frequency of existing disclosures about other-than-temporary impairments for debt and equity securities. This guidance is effective for interim and annual reporting periods ending after June 15, 2009, and is applied prospectively. Regions adopted these provisions during the second quarter of 2009. Refer to Note 4 for additional information. In June 2009, the FASB issued accounting guidance related to the accounting for transfers of financial assets. This guidance eliminates the concept of a qualifying special-purpose entity from consolidation guidance and the exception for guaranteed mortgage securitizations when a transferor had not surrendered control over the transferred financial assets. The guidance changes the requirements for derecognizing financial assets and also calls for additional disclosures about transfers of financial assets. This guidance is effective for fiscal years beginning after November 15, 2009 and its adoption did not have a material impact to the consolidated financial statements. 143 In June 2009, the FASB issued accounting guidance modifying how a company determines when a VIE should be consolidated. It also requires a qualitative assessment of an entity’s determination of the primary beneficiary of a VIE based on whether the entity 1) has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, and 2) has the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. An ongoing reassessment is also required to determine whether a company is the primary beneficiary of a VIE as well as additional disclosures about a company’s involvement in VIEs. This guidance is effective for fiscal years beginning after November 15, 2009 and its adoption did not have a material impact to the consolidated financial statements. In August 2009, the FASB issued updated guidance to further guidance on how to measure the fair value of a liability and is effective for the first reporting period beginning after August 26, 2009. The adoption of this guidance did not have a material impact to the consolidated financial statements. In January 2010, the FASB issued accounting guidance regarding disclosures of fair value measurements. The guidance requires additional disclosures related to the transfers in and out of fair value hierarchy and the activity of Level 3 financial instruments. The guidance also provides clarification for the classification of financial instruments and the discussion of inputs and valuation techniques. The new disclosures and clarification are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures related to the activity of Level 3 financial instruments. Those disclosures are effective for periods beginning after December 15, 2010 and for interim periods within those years. All provisions of the guidance were adopted by Regions during the first quarter of 2010. See the “Fair Value Measurements” section above and Note 21 for additional information regarding fair value measurements. In February 2010, the FASB issued updated guidance which defers, for certain investment funds, the consolidation requirements as a result of updated consolidation guidance. Specifically, the deferral is applicable for a reporting entity’s interest in an entity (1) that has all the attributes of an investment company or (2) for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies. This guidance is effective for periods beginning after November 15, 2009. Regions adopted its provisions during the first quarter of 2010. The adoption of this guidance did not have a material impact to the consolidated financial statements. In March 2010, the FASB issued accounting guidance relating to the scope exception related to embedded credit derivatives amending and clarifying the accounting for credit derivatives embedded in interests in securitized financial assets. This guidance is effective for interim periods beginning after June 15, 2010 and its adoption did not have a material impact to the consolidated financial statements. In July 2010, the FASB issued accounting guidance related to disclosures about the credit quality of financing receivables and the allowance for credit losses. The amended guidance applies to all financing receivables except for short-term trade receivables and receivables measured at either fair value or the lower of cost or fair value. The objective of the amendment is disclosure of information that enables financial statement users to understand the nature of inherent credit risks, the entity’s method of analysis and assessment of credit risk in estimating the allowance for credit losses, and the reasons for changes in both the receivables and allowances when examining a creditor’s portfolio of financing receivables and its allowance for losses. Under the new guidance, the disaggregation of financing receivables will be disclosed by portfolio segment or by class of financing receivable. The amended guidance is applicable to period-end balances beginning with the first interim or annual reporting period ending on or after December 15, 2010. Regions adopted this guidance as of December 31, 2010 for the disclosures related to end of period financial reporting. See Note 6 for additional information regarding the allowance for credit losses. In December 2010, the FASB issued guidance for the consideration an entity must give regarding whether it is more likely than not that goodwill impairment exists for each reporting unit with a zero or negative carrying 144 amount. As a result, an entity can no longer assert that a reporting unit is not required to perform the second step of the goodwill impairment test because the carrying amount of the reporting unit is zero or negative, despite the existence of the qualitative factors that indicate goodwill is more likely than not impaired. The amended guidance is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2010, with early adoption prohibited. The adoption of this guidance did not have a material impact to the consolidated financial statements. In January 2011, the FASB issued accounting guidance temporarily deferring the effective date for when public-entity creditors are required to provide new disclosures, which were addressed in previously issued guidance regarding receivables, for TDRs. The deferred effective date coincides with the effective date for the clarified guidance about what constitutes a TDR for creditors, which was issued in April 2011 by the FASB. Regions applied the clarified definition to all loans modified after January 1, 2011, and reported any newly identified TDRs beginning with third quarter financial reporting. The adoption of the standard did not materially impact the overall level of the allowance for loan losses. The guidance also requires new disclosures for TDRs, which were implemented with third quarter financial reporting. See Note 6 for a description of the impact of the new guidance as well as the newly-required disclosures. FUTURE APPLICATION OF ACCOUNTING STANDARDS In October 2010, the FASB issued guidance addressing the diversity in practice regarding which costs related to the acquisition or renewal of insurance contracts qualify as deferred acquisition costs for insurance entities. This update amends guidance related to financial services by requiring that costs incurred with the acquisition and renewal of insurance contracts be capitalized as deferred acquisition costs. Incremental direct costs, portions of employees’ compensation associated with time spent acquiring contracts, and other costs directly relating to the advertising, underwriting, issuing and processing of insurance policies are costs that should be capitalized to the extent that they would not have otherwise been incurred had the contracts not been successfully acquired. The amended guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2011. Early adoption at the beginning of an entity’s fiscal year is permitted. Regions is in the process of reviewing the potential impact of this guidance; however, its adoption is not expected to have a material impact to the consolidated financial statements. In April 2011, the FASB issued accounting guidance to reconsider effective control for repurchase agreements. The guidance will simplify the accounting for financial assets transferred under repurchase agreements and similar arrangements, and will increase the number of transfers to be accounted for as secured borrowings, as opposed to sales. The amended guidance is effective prospectively for new transfers and existing transactions modified as of the first interim or annual period beginning on or after December 15, 2011. Regions periodically accesses funding markets through sales of securities with agreements to repurchase. Repurchase agreements are also offered through a commercial banking sweep product as a short-term investment opportunity for customers. All such arrangements are considered typical of the banking and brokerage industries and are accounted for as borrowings. Regions is assessing the amended guidance and does not expect a material impact upon adoption. In May 2011, the FASB issued new guidance to create a uniform framework for applying fair value measurement principles for companies around the world. The new guidance eliminates differences between GAAP and International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board. New disclosures required by the guidance include: quantitative information about the significant unobservable inputs used for Level 3 measurements; a qualitative discussion about the sensitivity of recurring Level 3 measurements to changes in the unobservable inputs disclosed, including the interrelationship between inputs; and a description of the company’s valuation processes. This guidance is effective for interim and annual periods beginning after December 15, 2011, and all amendments will be applied prospectively with any changes in measurements recognized in income in the period of adoption. Regions is assessing the amended guidance and does not expect a material impact upon adoption. 145 In June 2011, the FASB issued new guidance amending disclosure requirements for the presentation of comprehensive income. The guidance eliminates the option to present components of other comprehensive income (“OCI”) as part of the statement of changes in shareholders’ equity. All changes in OCI will be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. The guidance does not change the items that must be reported in OCI. This guidance is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2011 with early adoption permitted. The adoption of this guidance will not impact Regions’ consolidated financial position, results of operations or cash flows and will only impact the presentation of OCI in the consolidated financial statements. In September 2011, the FASB issued accounting guidance related to goodwill impairment testing. The guidance allows entities to elect to first perform qualitative tests to determine the likelihood that the entity’s fair value is less than its carrying value. If it is determined that it is more likely that the fair value of a reporting entity is less than its carrying amount, the entity would then perform the first step of the goodwill impairment test. The guidance refers to several factors to consider when performing the qualitative analysis, including: macroeconomic factors, industry factors, and entity-specific factors. The guidance is effective prospectively for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Regions is assessing the amended guidance and does not expect a material impact upon adoption. In December 2011, the FASB issued new accounting guidance that eliminates offsetting of financial instruments disclosure differences between GAAP and IFRS. New disclosures will be required for recognized financial instruments, such as derivatives, repurchase agreements, and reverse repurchase agreements, that are either (1) offset on the balance sheet in accordance with the FASB’s offsetting guidance or (2) subject to an enforceable master netting arrangement or similar agreement, regardless of whether they are offset in accordance with the FASB’s offsetting guidance. The objective of the new disclosure requirements is to enable users of the financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments. This amended guidance will be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The adoption of this guidance, which involves disclosure only, will not impact Regions’ consolidated financial position or results of operations. NOTE 2. VARIABLE INTEREST ENTITIES Regions is involved in various entities that are considered to be VIEs, as defined by authoritative accounting literature. Generally, a VIE is a corporation, partnership, trust or other legal structure that either does not have equity investors with substantive voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. The following discusses the VIEs in which Regions has a significant interest. Regions owns the common stock of subsidiary business trusts, which have issued mandatorily redeemable preferred capital securities (“trust preferred securities”) in the aggregate of approximately $1 billion at the time of issuance. These trusts meet the definition of a VIE of which Regions is not the primary beneficiary; the trusts’ only assets are junior subordinated debentures issued by Regions, which were acquired by the trusts using the proceeds from the issuance of the trust preferred securities and common stock. The junior subordinated debentures are included in long-term borrowings (see Note 12) and Regions’ equity interests in the business trusts are included in other assets on the consolidated balance sheets. Interest expense on the junior subordinated debentures is reported in interest expense on long-term borrowings. For regulatory reporting and capital adequacy purposes, the Federal Reserve Board has indicated that such trust preferred securities currently constitute Tier 1 capital, but beginning in 2013, trust preferred securities will be phased out as an allowable component of Tier 1 capital over a three-year period. 146 Regions Morgan Keegan Timberland Group, a wholly-owned subsidiary of Regions that is managed by the trust division, operates and acts as trustee for timber land and related assets in timber land funds, primarily serving institutional investors. These funds individually meet the definition of a VIE, of which Regions is not the primary beneficiary, and collectively meet the criteria for a qualified asset manager; accordingly, Regions Morgan Keegan Timberland Group does not currently consolidate these funds. The accounting standard related to consolidation accounting for qualified asset managers is expected to be revisited at some point in the future. Regions periodically invests in various limited partnerships that sponsor affordable housing projects, which are funded through a combination of debt and equity. These partnerships meet the definition of a VIE. Due to the nature of the management activities of the general partner, Regions is not the primary beneficiary of these partnerships and accounts for these investments in other assets on the consolidated balance sheets using the equity method. Regions reports its equity share of the partnership gains and losses as an adjustment to non-interest income. Regions reports its commitments to make future investments in other liabilities on the consolidated balance sheets. The Company also receives tax credits, which are reported as a reduction of income tax expense (or increase to income tax benefit). Additionally, Regions has short-term construction loans or letters of credit commitments with certain limited partnerships. The funded portion of the short-term loans and letters of credit is classified as commercial and industrial loans on the consolidated balance sheets. A summary of Regions’ equity method investments and related loans and letters of credit, representing Regions’ maximum exposure to loss as of December 31 is as follows: Equity method investments included in other assets . . . . . . . . . . . . . . . . . . . . Unfunded commitments included in other liabilities . . . . . . . . . . . . . . . . . . . Short-term construction loans and letters of credit commitments . . . . . . . . . Funded portion of short-term loans and letters of credit . . . . . . . . . . . . . . . . . $873 184 180 59 $893 196 213 61 2011 2010 (In millions) NOTE 3. DISCONTINUED OPERATIONS On January 11, 2012, Regions entered into a stock purchase agreement to sell Morgan Keegan & Company, Inc. and related affiliates to Raymond James Financial Inc., for approximately $930 million in cash. As part of the transaction, Morgan Keegan will also pay Regions a dividend of $250 million before closing, pending regulatory approval, resulting in total proceeds of approximately $1.18 billion to Regions, subject to adjustment. The transaction is anticipated to close around the end of the first quarter of 2012, subject to regulatory approvals and customary closing conditions. Morgan Asset Management and Regions Morgan Keegan Trust are not included in the sale. The transaction purchase price is subject to adjustment based on the closing tangible book value of the entities being sold and retention of Morgan Keegan associates as of 90 days post-closing. Regions believes any adjustments to the sales price will not have a material impact to the consolidated financial statements. Regions will indemnify Raymond James for all litigation matters related to pre-closing activities. See Note 23 “Commitments, Contingencies and Guarantees” and Note 25 “Subsequent Event” to the consolidated financial statements for related discussions. In connection with the agreement, the results of the entities being sold are reported in the Company’s consolidated statements of operations separately as discontinued operations for all periods presented because the pending sale met all of the criteria for reporting as discontinued operations at December 31, 2011. 147 The following table represents the condensed results of operations for discontinued operations for the years ended December 31: Year Ended December 31 2011 2010 (In millions, except per share data) $ 2009 $ 52 9 $ 55 13 37 6 42 950 40 990 634 32 30 — — 270 966 66 23 Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-interest income: Brokerage, investment banking and capital markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-interest expense: Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and equipment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other 31 938 57 995 644 36 30 492 — 232 43 990 52 1,042 678 37 27 — 125 259 Total non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,434 1,126 Income (loss) from discontinued operations before income taxes . . . . . . . . . . . . . Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (408) (4) (41) 30 Income (loss) from discontinued operations, net of tax . . . . . . . . . . . . . . . . . . . . . $ (404) $ (71) $ 43 Earnings (loss) per common share from discontinued operations: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.32) $ (0.32) $ (0.06) $ (0.06) $0.04 $0.04 A summary of the major categories of assets and liabilities (including related deferred taxes) of the entities being sold as of December 31 is as follows: Assets: Cash and due from banks . . . . . . . . . . . . . . . . . . . . . Securities purchased under agreements to resell . . . . Trading account assets . . . . . . . . . . . . . . . . . . . . . . . Other interest-earning assets . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 2010 (In millions) $ 232 200 1,088 340 — 944 $ 69 196 975 404 545 817 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,804 $3,006 Liabilities: Securities sold under agreements to repurchase . . . . Other short-term borrowings . . . . . . . . . . . . . . . . . . . Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 253 678 — 914 $ 177 593 35 889 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . $1,845 $1,694 148 NOTE 4. SECURITIES The amortized cost, gross unrealized gains and losses, and estimated fair value of securities available for sale and securities held to maturity are as follows: Amortized Cost December 31, 2011 Gross Gross Unrealized Unrealized Losses Gains (In millions) Securities available for sale: U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Obligations of states and political subdivisions . . . . . . . . . . . . Mortgage-backed securities: Residential agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential non-agency . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial non-agency . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate and other debt securities . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 95 147 24 21,688 15 318 314 539 817 $ 3 — 12 494 1 8 7 5 2 $— — — (7) — — — (7) (4) Estimated Fair Value $ 98 147 36 22,175 16 326 321 537 815 Securities held to maturity: U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage-backed securities: Residential agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4 3 9 $— — $ 16 $ $— — — $— $ $ 4 3 10 17 1 1 $23,957 $532 $ (18) $24,471 December 31, 2010 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value (In millions) Securities available for sale: U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Obligations of states and political subdivisions . . . . . . . . . . . . Mortgage-backed securities: Residential agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential non-agency . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial non-agency . . . . . . . . . . . . . . . . . . . . . . . . . . Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 85 16 23 21,735 20 113 103 27 1,047 $ — 6 7 265 2 2 — — 1 $ — — — (155) — (3) (3) (2) — $ 91 16 30 21,845 22 112 100 25 1,048 Securities held to maturity: U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage-backed securities: . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,169 $283 $(163) $23,289 $ $ 5 5 12 2 24 $ 1 — 1 — $ 2 $ — — — — $ — $ $ 6 5 13 2 26 149 Morgan Keegan had approximately $2 million and $1 million in securities available for sale at December, 31, 2011 and 2010, respectively. Morgan Keegan had no securities held to maturity at December 31, 2011 and approximately $2 million at December 31, 2010. Equity securities in the tables above included the following amortized cost related to Federal Reserve Bank stock and Federal Home Loan Bank (“FHLB”) stock. Shares in the Federal Reserve Bank and FHLB are accounted for at amortized cost, which approximates fair value. Federal Reserve Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal Home Loan Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31 2010 2011 (In millions) $481 219 $471 419 Securities with carrying values of $14.3 billion and $15.4 billion at December 31, 2011 and 2010, respectively, were pledged to secure public funds, trust deposits and certain borrowing arrangements. The amortized cost and estimated fair value of securities available for sale and securities held to maturity at December 31, 2011, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Cost Estimated Fair Value (In millions) Securities available for sale: Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage-backed securities: Residential agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential non-agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial non-agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 67 301 323 114 21,688 15 318 314 817 $ 67 303 323 125 22,175 16 326 321 815 Securities held to maturity: Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage-backed securities: Residential agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,957 $24,471 $ $ 3 4 — — 9 16 $ $ 3 4 — — 10 17 150 The following tables present gross unrealized losses and estimated fair values of securities available for sale at December 31, 2011 and 2010. There were no gross unrealized losses on debt securities held to maturity at both December 31, 2011 and 2010. These securities are segregated between investments that have been in a continuous unrealized loss position for less than twelve months and twelve months or more. Mortgage-backed securities: Residential agency . . . . . . Commercial agency . . . . . Commercial non-agency . . . . . . . . . . All other securities . . . . . . . . . . December 31, 2011 Less Than Twelve Months Twelve Months or More Total Estimated Fair Value Gross Unrealized Losses Estimated Fair Value Gross Unrealized Losses Estimated Fair Value Gross Unrealized Losses (In millions) $1,778 — — 291 $2,069 $ (7) — — (9) $ (16) $— — — 5 5 $ $— — — (2) $ (2) $1,778 — — 296 $2,074 $ (7) — — (11) $ (18) December 31, 2010 Less Than Twelve Months Twelve Months or More Total Estimated Fair Value Gross Unrealized Losses Estimated Fair Value Gross Unrealized Losses Estimated Fair Value Gross Unrealized Losses (In millions) Mortgage-backed securities: Residential agency . . . . . . Commercial agency . . . . . Commercial $11,023 94 non-agency . . . . . . . . . . All other securities . . . . . . . . . . 100 — $(155) (3) (3) — $— — — $11,217 $(161) $ $— — — (2) $11,023 94 $(155) (3) 100 5 (3) (2) $ (2) $11,222 $(163) 5 5 The Company does not intend to sell, and it is not likely that the Company will be required to sell the securities before the recovery of their amortized cost basis, which may be at maturity. For the securities included in the tables above, management does not believe any individual unrealized loss, which was comprised of 524 securities and 292 securities at December 31, 2011 and 2010, respectively, represented an other-than-temporary impairment as of those dates. 151 The Company reviews its securities portfolio on a regular basis to determine if there are any conditions indicating that a security has other-than-temporary impairment. Factors considered in this determination include the length of time and the extent to which the market value has been below cost, the credit standing of the issuer, Regions’ intent to sell and whether it is more likely than not that the Company will have to sell the security before its market value recovers. For debt securities, activity related to the credit loss component of other-than- temporary impairment is recognized in earnings, and the portion of other-than-temporary impairment related to all other factors is recognized in other accumulated comprehensive income (loss). Additionally, the Company recognizes impairment of available for sale equity securities when the current market value is below the highest traded price within the past six months. The cost basis of the securities is adjusted to current fair value with the entire offset recorded in the statement of operations. For the years ended December 31, 2011, 2010 and 2009, activity related to the credit loss component for debt securities where a portion of the other-than-temporary impairment was recognized in other comprehensive income is as follows: 2011 2010 2009 Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions for the credit loss component of other-than-temporary impairments of debt securities recognized in earnings where a portion of the impairment was charged to other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Reductions for the sale of securities where a portion of the impairment was previously charged to other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — 47 (47) (In millions) $— $— $— Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $— $— The following tables provide details of other-than-temporary impairment charges for the years ended December 31: Non-agency residentail mortgage-backed securities: 2011 2010 2009 (In millions) Gross charges(1) Non-credit charges to other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . — . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $— $ 238 (191) — Other-than-temporary impairment(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Municipal securities, gross charges(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Corporate and other debt securities(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Equity securities, gross charges(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 47 16 1 — 12 1 2 Total gross charges(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. Total other-than-temporary impairment, net(2) . . . . . . . . . . . . . . . . . . . . . . . . . .. $ $ 2 2 $ $ 2 2 $ 266 $ 75 (1) Includes credit portion reported in earnings and non-credit portion reported in other comprehensive income (loss). (2) Net other-than-temporary inpairment reported in earnings. (3) All impairment for thoese securities is credit-related; therefore, gross charges equals the net amount reported in earnings. The Company estimates the amount of losses attributable to credit using a third-party discounted cash flow model that compiles relevant details on the underlying loans’ borrower and collateral performance on a security-by-security basis. Assumptions including delinquencies, default rates, credit subordination support, prepayment rates, and loss severity based on the underlying collateral characteristics and year of origination are considered to estimate the future cash flows. Assumptions used can vary widely from loan to loan, and are influenced by such factors as interest rates, geography, borrower specific data and underlying collateral. Expected future cash flows are then calculated using a discount rate that management believes a market 152 participant would consider in determining the fair value. Based on the results of the estimated future cash flows, the Company determines the amount of estimated losses related to credit and the remaining unrealized loss for which recovery is expected. Significant weighted-average assumptions specific to non-agency residential mortgage-backed securities for which other-than-temporary impairment was recorded during 2009 include a 22.9 percent collateral default rate projection, 9.2 percent credit subordination support and 14.2 percent delinquency rate. There was no other-than-temporary impairment related to credit loss where the remaining unrealized loss recovery was expected during 2011 or 2010. Proceeds from sale, gross gains and gross losses from continuing operations on sales of available for sale securities are shown in the table below. The cost of securities sold is based on the specific identification method. For the Years Ended December 31 2011 2010 2009 Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross securities gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross securities losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,859 112 — (In millions) $10,340 424 (30) $5,451 187 (118) Net securities gains (losses) . . . . . . . . . . . . . . . . . . . . $ 112 $ 394 $ 69 The following table details net gains (losses) for trading account securities for the years ended December 31: Total net gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32 (7) (In millions) $52 30 2011 2010 2009 $60 27 For the Years Ended December 31 Morgan Keegan had approximately $35 million, $51 million, and $52 million in total net gains associated with trading account securities for the years ended December 31, 2011, 2010 and 2009, respectively. NOTE 5. LOANS The loan portfolio, net of unearned income, at December 31 consisted of the following: 2011 2010 (In millions, net of unearned income) Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate mortgage—owner occupied . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate construction—owner occupied . . . . . . . . . . . . . . . . . . . . . $24,522 11,166 337 Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial investor real estate mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial investor real estate construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total investor real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential first mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indirect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,025 9,702 1,025 10,727 13,784 13,021 1,848 987 1,202 30,842 $22,540 12,046 470 35,056 13,621 2,287 15,908 14,898 14,226 1,592 — 1,184 31,900 $77,594 $82,864 153 During 2011, Regions purchased approximately $1.1 billion of Regions-branded credit card accounts from FIA Card Services. The purchase included approximately $1.0 billion in consumer credit card accounts with the remainder in small business credit card accounts, which are included in the commercial and industrial portfolio class. During 2011, Regions also purchased approximately $675 million in indirect loans from a third party. The loan portfolio is diversified geographically, primarily within Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Mississippi, Missouri, North Carolina, South Carolina, Tennessee, Texas and Virginia. Regions considers its investor real estate (specifically loans secured by land, multi-family and retail) and home equity loans secured by second liens in Florida to be concentrations resulting from continued economic pressures and downturns in the real estate market. Land totaled $857 million at December 31, 2011 as compared to $1.6 billion at December 31, 2010. Multi-family and retail totaled $4.9 billion at December 31, 2011 as compared to $7.3 billion at December 31, 2010. The credit quality of the investor real estate portfolio segment is sensitive to risks associated with construction loans such as cost overruns, project completion risk, general contractor credit risk, environmental and other hazard risks, and market risks associated with the sale or rental of completed properties. The portion of the home equity portfolio where the collateral is comprised of second liens in Florida was $2.8 billion and $3.2 billion at December 31, 2011 and 2010, respectively. The following table includes certain details related to loans, net of unearned income for the years ended December 31: Unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Unamortized fees) and deferred loan costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unamortized discounts, net For the Years Ended December 31 2011 2010 (In millions) $870 (27) 21 $1,042 14 23 The following tables include details regarding Regions’ investment in leveraged leases included within the commercial and industrial loan portfolio class as of and for the years ended December 31: Rentals receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated residuals on leveraged leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unearned income on leveraged leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $855 315 703 $1,040 315 844 2011 2010 (In millions) Pre-tax income from leveraged leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense on income from leveraged leases . . . . . . . . . . . . . . . . . . . . . For the Years Ended December 31 2011 2010 2009 (In millions) $67 53 $100 72 $46 45 The income above does not include leveraged lease termination gains of $8 million, $78 million and $587 million with related income tax expense of zero, $74 million and $589 million for the years ended December 31, 2011, 2010 and 2009, respectively. Of the balances at December 31, 2011 and 2010, approximately $4.3 billion and $2.3 billion, respectively, of residential first mortgage loans on one-to-four family dwellings, as well as $10.4 billion and $11.5 billion, 154 respectively, of home equity loans held by Regions were pledged to secure borrowings from the FHLB (see Note 12 for further discussion). At December 31, 2011, approximately $9.0 billion of commercial and industrial loans, $9.7 billion of owner-occupied commercial real estate and investor real estate loans and $709 million of other consumer loans held by Regions were pledged to the Federal Reserve Bank. At December 31, 2010, approximately $9.8 billion of commercial and industrial loans, $15.9 billion of owner-occupied commercial real estate and investor real estate loans and $1.1 billion of other consumer loans held by Regions were pledged to the Federal Reserve Bank. Directors and executive officers of Regions and its principal subsidiaries, including the directors’ and officers’ families and affiliated companies, are loan and deposit customers and have other transactions with Regions in the ordinary course of business. Total loans to these persons (excluding loans which in the aggregate do not exceed $60,000 to any such person) at December 31, 2011 and 2010 were approximately $154 million and $156 million, respectively. These loans were made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other persons and involve no unusual risk of collectability. NOTE 6. ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses represents management’s estimate of credit losses inherent in the loan and credit commitment portfolios as of year-end. The allowance for credit losses consists of two components: the allowance for loan and lease losses and the reserve for unfunded credit commitments. Management’s assessment of the appropriateness of the allowance for credit losses is based on a combination of both of these components. Regions determines its allowance for credit losses in accordance with applicable accounting literature as well as regulatory guidance related to receivables and contingencies. Binding unfunded credit commitments include items such as letters of credit, financial guarantees and binding unfunded loan commitments. CALCULATION OF ALLOWANCE FOR CREDIT LOSSES Commercial and Investor Real Estate Components Impaired Loans For non-accrual commercial and investor real estate loans (including TDRs) equal to or greater than $2.5 million, the allowance for loan losses is based on specific evaluation considering the facts and circumstances specific to each borrower. Beginning in the third quarter of 2011, for commercial and investor real estate accruing TDRs and non-accruing TDRs less than $2.5 million, the allowance for loan losses is based on a discounted cash flow analysis performed at the note level, where projected cash flows reflect credit losses based on statistical information (including historical default information) derived from loans with similar risk characteristics (e.g., credit quality indicator and product type) using probability of default (“PD”) and loss-given default (“LGD”) as described in the following paragraph. Prior to this change, accruing TDRs equal to or greater than $2.5 million were evaluated using the specific identification method, and all TDRs less than $2.5 million were evaluated in the pooled methodology described below. This change in the estimation process did not have a material impact to the overall level of the allowance for loan losses or the provision for loan losses. Non-Impaired Loans For all other commercial and investor real estate loans, the allowance for loan losses is calculated at a pool level based on credit quality indicators and product type. A statistically determined PD and LGD are calculated. Historical default information for similar loans is used as an input for the statistical model. Additionally, LGD estimates for certain commercial and investor real estate properties are updated within the allowance calculation quarterly using historical loss information that incorporates standard discount factors applied when those properties are transferred into foreclosed properties. The standard discount factor is based on historical amounts realized upon ultimate disposition of these properties. The pool level allowance is calculated using the PD and LGD estimates. 155 Prior to 2011, the allowance for accruing non-impaired commercial and investor real estate loans, as well as non-accrual loans in those portfolio segments below $2.5 million, was determined using categories of pools of loans with similar risk characteristics (i.e., pass, special mention, substandard accrual, and non-accrual as defined below). These categories were utilized to develop the associated allowance for loan losses using historical losses. Beginning in 2011, these pools were compiled at a more granular level, and the pool-level allowance was based on the PD and LGD parameters described above. The Company made the change to provide enhanced segmentation, process controls, transparency, governance and information technology controls. The changes in the estimation process did not have a material impact on the overall allowance for credit losses or provision for loan losses. Consumer Components For consumer loans, the classes are segmented into pools of loans with similar risk characteristics. For non-TDR consumer loans, historical losses are the primary factor in establishing the allowance allocated to each pool. Regions reviews the historical loss rates for each pool. The twelve month loss rate is the basis for the allocation; it may be adjusted as a result of any deteriorating trends and portfolio growth. The allowance for loan losses for residential first mortgage TDRs is calculated based on a discounted cash flow analysis on pools of homogeneous loans. Cash flows are projected using the restructured terms and then discounted at the original note rate. The projected cash flows assume a default rate, which is based on historical performance of residential first mortgage TDRs. For home equity TDRs, a historical loss model is used to determine the allowance for loan losses. The default rate for all classes of consumer TDRs is a measure of delinquency, which is considered in both the allowance for loan loss calculation related to consumer TDRs and in the accrual status decisions of TDRs after the modification, for which it is a key determinant along with collateral valuation. Qualitative Factors While quantitative allowance methodologies strive to reflect all risk factors, potential imprecision exists in the estimation process due to the inherent time lag of obtaining information and variations between estimates and actual outcomes. Additionally, exposures to industries experiencing various levels of economic stress lead to losses which are not captured in the statistical models. Regions adjusts the allowance in consideration of these factors. The allowance calculation also includes factors which may not be directly measured in the specific or pooled calculations, including: • • Credit quality trends, Loss experience in particular portfolios, • Macroeconomic factors such as unemployment or real estate prices, • • Changes in risk selection and underwriting standards, Shifts in credit quality of consumer customers which is not yet reflected in the historical data. Management considers the current level of allowance for credit losses appropriate to absorb losses inherent in the loan portfolio and unfunded commitments. Management’s determination of the appropriateness of the allowance for credit losses, which is based on the factors and risk identification procedures previously discussed, requires the use of judgments and estimations that may change in the future. Specifically, the allowance calculation includes estimates of PD, LGD, amount and timing of expected future cash flows, value of collateral, and qualitative factors such as changes in economic conditions. Changes in the factors used by management to determine the appropriateness of the allowance or the availability of new information could cause the allowance for credit losses to be adjusted in future periods. 156 Reserve for Unfunded Credit Commitments The reserve for unfunded credit commitments is based on an analysis of probability of funding and historical losses. The estimate is calculated based on pools of commitments with similar credit characteristics (e.g., product type and summary risk rating). The pool-level commitment balance is multiplied by a probability of funding and a loss factor, which is based on historical losses adjusted for current conditions to arrive at the reserve. ROLLFORWARD OF ALLOWANCE FOR CREDIT LOSSES The following table presents an analysis of the allowance for credit losses by portfolio segment for the year ended December 31, 2011. The total allowance for credit losses as of December 31, 2011 is then disaggregated to detail the amounts derived through individual evaluation and the amounts calculated through collective evaluation. The allowance for credit losses related to individually evaluated loans includes reserves for non-accrual loans and leases equal to or greater than $2.5 million. The allowance for credit losses related to collectively evaluated loans includes the remainder of the portfolio. 2011 Commercial Investor Real Estate Consumer Total Allowance for loan losses, January 1, 2011 . . . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan losses: $ 1,055 475 Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (550) 50 (500) Allowance for loan losses, December 31, 2011 . . . . . . . . . . . . . . 1,030 Reserve for unfunded credit commitments, January 1, 2011 . . . . Provision for unfunded credit commitments . . . . . . . . . . . . $ Reserve for unfunded credit commitments, December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32 (2) 30 Allowance for credit losses, December 31, 2011 . . . . . . . . . . . . . $ 1,060 $ 1,017 Portion of allowance ending balance: Individually evaluated for impairment . . . . . . . . . . . . . . . . . Collectively evaluated for impairment . . . . . . . . . . . . . . . . . $ 101 959 $ 169 848 Total allowance evaluated for impairment . . . . . . . . . . . . . . . . . . $ 1,060 $ 1,017 (In millions) $ $ 1,370 468 760 587 $ 3,185 1,530 (880) 33 (847) 991 16 10 26 (677) 54 (623) 724 (2,107) 137 (1,970) 2,745 $ 23 (1) 22 71 7 78 746 $ 2,823 1 745 746 $ 271 2,552 $ 2,823 $ $ $ $ Portion of loan portfolio ending balance: Individually evaluated for impairment . . . . . . . . . . . . . . . . . Collectively evaluated for impairment . . . . . . . . . . . . . . . . . $ 473 35,552 $ 624 10,103 $ 7 30,835 $ 1,104 76,490 Total loans evaluated for impairment . . . . . . . . . . . . . . . . . . . . . . $36,025 $10,727 $30,842 $77,594 157 An analysis of the allowance for credit losses in the aggregate for the years ended December 31, 2010 and 2009 follows: Allowance for loan losses at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan losses: 2010 2009 (In millions) $ 3,114 2,863 $ 1,826 3,541 Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,912) 120 (2,369) 116 Net loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,792) (2,253) Allowance for loan losses at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,185 $ 3,114 Reserve for unfunded credit commitments at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . Provision for unfunded credit commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Reserve for unfunded credit commitments at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 74 (3) 71 74 — 74 Allowance for credit losses at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,256 $ 3,188 PORTFOLIO SEGMENT RISK FACTORS The following describe the risk characteristics relevant to each of the portfolio segments. Commercial—The commercial loan portfolio segment includes commercial and industrial loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases or other expansion projects. Commercial also includes owner-occupied commercial real estate loans to operating businesses, which are loans for long-term financing of land and buildings, and are repaid by cash flow generated by business operations. Owner-occupied construction loans are made to commercial businesses for the development of land or construction of a building where the repayment is derived from revenues generated from the business of the borrower. Collection risk in this portfolio is driven by the creditworthiness of underlying borrowers, particularly cash flow from customers’ business operations. Investor Real Estate—Loans for real estate development are repaid through cash flow related to the operation, sale or refinance of the property. This portfolio segment includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of real estate or income generated from the real estate collateral. A portion of Regions’ investor real estate portfolio segment is comprised of loans secured by residential product types (land, single-family and condominium loans) within Regions’ markets. Additionally, these loans are made to finance income-producing properties such as apartment buildings, office and industrial buildings, and retail shopping centers. Loans in this portfolio segment are particularly sensitive to valuation of real estate. Consumer—The consumer loan portfolio segment includes residential first mortgage, home equity, indirect, consumer credit card, and other consumer loans. Residential first mortgage loans represent loans to consumers to finance a residence. These loans are typically financed over a 15 to 30 year term and, in most cases, are extended to borrowers to finance their primary residence. Home equity lending includes both home equity loans and lines of credit. This type of lending, which is secured by a first or second mortgage on the borrower’s residence, allows customers to borrow against the equity in their home. Real estate market values as of the time the loan or line is secured directly affect the amount of credit extended and, in addition, changes in these values impact the depth of potential losses. Indirect lending, which is lending initiated through third-party business partners, is largely comprised of loans made through automotive dealerships. Consumer credit card includes approximately 500,000 Regions branded consumer credit card accounts purchased during 2011 from FIA Card Services. Other consumer loans include direct consumer installment loans and overdrafts. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures. 158 CREDIT QUALITY INDICATORS The following tables present credit quality indicators for the loan portfolio segments and classes, excluding loans held for sale. Commercial and investor real estate loan classes are detailed by categories related to underlying credit quality and probability of default. These categories are utilized to develop the associated allowance for credit losses. • • • Pass—includes obligations where the probability of default is considered low; Special Mention—includes obligations that have potential weakness which may, if not reversed or corrected, weaken the credit or inadequately protect the Company’s position at some future date. Obligations in this category may also be subject to economic or market conditions which may, in the future, have an adverse affect on debt service ability; Substandard Accrual—includes obligations that exhibit a well-defined weakness which presently jeopardizes debt repayment, even though they are currently performing. These obligations are characterized by the distinct possibility that the Company may incur a loss in the future if these weaknesses are not corrected; • Non-accrual—includes obligations where management has determined that full payment of principal and interest is in doubt and includes the substandard non-accrual, doubtful and loss categories. Substandard accrual and non-accrual loans are often collectively referred to as “classified.” Special mention, substandard accrual, and non-accrual loans are often collectively referred to as “criticized and classified.” Classes in the consumer portfolio segment are disaggregated by accrual status. As described in detail above, the associated allowance for credit losses is based on historical losses of the various classes adjusted for current economic conditions. December 31, 2011 Pass Special Mention Substandard Accrual Non-accrual Total Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate mortgage—owner occupied . . . Commercial real estate construction—owner $22,952 9,773 $479 262 (In millions) $ 634 541 $ 457 590 $24,522 11,166 occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275 27 10 25 337 Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . $33,000 $768 $1,185 $1,072 $36,025 Commerical investor real estate mortgage . . . . . . . . . . . Commercial investor real estate construction . . . . . . . . . 6,851 531 756 113 1,361 201 734 180 9,702 1,025 Total investor real estate . . . . . . . . . . . . . . . . . . . . . $ 7,382 $869 $1,562 $ 914 $10,727 Accrual Non-accrual Total Residential first mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indirect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other consumer $13,534 12,885 1,848 987 1,202 (In millions) $250 136 — — — Total consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,456 $386 $13,784 13,021 1,848 987 1,202 $30,842 $77,594 159 December 31, 2010 Pass Special Mention Substandard Accrual Non-accrual Total . . . . . . . . . . . . . . . . . . . . . . . Commercial and industrial Commercial real estate mortgage—owner occupied . . . Commercial real estate construction—owner $20,764 10,344 $ 517 283 (In millions) $ 792 813 $ 467 606 $22,540 12,046 occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 393 25 23 29 470 Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . $31,501 $ 825 $1,628 $1,102 $35,056 Commerical investor real estate mortgage . . . . . . . . . . . Commercial investor real estate construction . . . . . . . . . 8,755 904 1,300 342 2,301 589 1,265 452 13,621 2,287 Total investor real estate . . . . . . . . . . . . . . . . . . . . . $ 9,659 $1,642 $2,890 $1,717 $15,908 Residential first mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indirect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other consumer $14,613 14,170 1,592 1,184 (In millions) $285 56 — — Total consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $31,559 $341 $14,898 14,226 1,592 1,184 $31,900 $82,864 Accrual Non-accrual Total AGING ANALYSIS The following tables include an aging analysis of days past due (DPD) for each portfolio class: Commercial and industrial . . . . . . . . Commercial real estate mortgage— owner occupied . . . . . . . . . . . . . . . Commercial real estate construction—owner occupied . . . Total commercial . . . . . . . . . . . Commercial investor real estate mortgage . . . . . . . . . . . . . . . . . . . . Commercial investor real estate construction . . . . . . . . . . . . . . . . . Total investor real estate . . . . . . Residential first mortgage . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . Indirect . . . . . . . . . . . . . . . . . . . . . . . Consumer credit card . . . . . . . . . . . . Other consumer . . . . . . . . . . . . . . . . . Total consumer . . . . . . . . . . . . . December 31, 2011 Accrual Loans 30-59 DPD 60-89 DPD 90+ DPD Total 30+ DPD Total Accrual Non-accrual Total $ 38 $ 23 $ 28 (In millions) 89 $ $24,065 $ 457 $24,522 47 3 88 34 23 57 187 121 26 8 20 362 23 1 47 42 5 47 100 77 7 5 6 195 9 — 37 13 — 13 284 93 2 14 4 397 79 4 172 89 28 117 571 291 35 27 30 954 10,576 590 11,166 312 25 337 34,953 1,072 36,025 8,968 845 9,813 13,534 12,885 1,848 987 1,202 30,456 734 180 914 250 136 — — — 386 9,702 1,025 10,727 13,784 13,021 1,848 987 1,202 30,842 $507 $289 $447 $1,243 $75,222 $2,372 $77,594 160 Commercial and industrial . . . . . . . . Commercial real estate mortgage— owner occupied . . . . . . . . . . . . . . . Commercial real estate construction—owner occupied . . . 47 3 Total commercial . . . . . . . . . . . 110 Commercial investor real estate mortgage . . . . . . . . . . . . . . . . . . . . 120 Commercial investor real estate construction . . . . . . . . . . . . . . . . . Total investor real estate . . . . . . Residential first mortgage . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . Indirect . . . . . . . . . . . . . . . . . . . . . . . Other consumer . . . . . . . . . . . . . . . . . Total consumer . . . . . . . . . . . . . 30 150 185 146 29 22 382 December 31, 2010 Accrual Loans 30-59 DPD 60-89 DPD 90+ DPD Total 30+ DPD Total Accrual Non-accrual Total $ 60 $ 43 $ 9 6 1 16 5 1 6 359 198 2 4 563 (In millions) $ 112 $22,073 $ 467 $22,540 107 4 223 216 43 259 662 422 39 32 1,155 11,440 606 12,046 441 29 470 33,954 1,102 35,056 12,356 1,265 13,621 1,835 14,191 14,613 14,170 1,592 1,184 31,559 452 2,287 1,717 15,908 285 56 — — 341 14,898 14,226 1,592 1,184 31,900 54 — 97 91 12 103 118 78 8 6 210 $642 $410 $585 $1,637 $79,704 $3,160 $82,864 161 IMPAIRED LOANS The following tables present details related to the Company’s impaired loans. Loans deemed to be impaired include non-accrual commercial and investor real estate loans, excluding leasing, and all TDRs (including accruing commercial, investor real estate, and consumer TDRs). Loans which have been fully charged-off do not appear in the tables below. Non-accrual Impaired Loans As of December 31, 2011 Unpaid Principal Balance(1) Charge-offs and Payments Applied(2) Book Value(3) Total Impaired Loans on Non- accrual Status Impaired Loans on Non- accrual Status with No Related Allowance Impaired Loans on Non- accrual Status with Related Allowance (Dollars in millions) Related Allowance for Loan Losses Coverage %(4) . . . . $ 468 $ 88 $ 380 $ 61 $ 319 $129 46.4% Commercial and industrial Commercial real estate mortgage—owner occupied . . . . . . . . . . . . . . . . . 679 88 870 37 1,184 Commercial real estate construction—owner occupied . . . . . . . . . . . . . . . . . Total commercial . . . . . . . . Commercial investor real estate mortgage . . . . . . . . . . . . . . . . Commercial investor real estate 236 construction . . . . . . . . . . . . . . 1,106 Total investor real estate . . 146 Residential first mortgage . . . . . Home equity . . . . . . . . . . . . . . . 26 Indirect . . . . . . . . . . . . . . . . . . . . — Other consumer . . . . . . . . . . . . . — 172 Total consumer . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . $2,462 12 188 136 56 192 49 10 — — 59 $439 591 25 996 734 180 914 97 16 — — 113 $2,023 34 1 96 63 23 86 — — — — — $182 557 24 900 671 157 828 97 16 — — 113 $1,841 192 10 331 223 62 285 15 2 — — 17 $633 41.2 59.5 43.8 41.3 50.0 43.1 43.8 46.2 — — 44.2 43.5% Accruing Impaired Loans As of December 31, 2011 Unpaid Principal Balance(1) Charge- offs and Payments Applied(2) Book Value(3) Related Allowance for Loan Losses Coverage %(4) Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 290 205 Commercial real estate mortgage—owner occupied . . . . . . . . . . . . . Commercial real estate construction—owner occupied . . . . . . . . . . . 2 497 Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 862 Commercial investor real estate mortgage . . . . . . . . . . . . . . . . . . . . . 140 Commercial investor real estate construction . . . . . . . . . . . . . . . . . . 1,002 Total investor real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,025 Residential first mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 428 Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Indirect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 1,509 Total consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,008 162 $ $ 289 202 (Dollars in millions) $ 60 1 3 30 2 — — 4 90 174 7 — 81 255 7 148 12 60 4 1 — — 55 — 1,493 16 $2,981 $ 27 493 855 140 995 1,013 424 1 209 $554 21.0% 16.1 — 18.9 21.0 57.9 26.1 15.6 15.0 — 1.8 14.9 19.3% The accruing loans in the table above are considered impaired due to their status as a TDR. Total Impaired Loans As of December 31, 2011 Book Value(3) Year Ended December 31, 2011 Unpaid Principal Balance(1) Charge-offs and Payments Applied(2) Total Impaired Loans Impaired Loans with No Related Allowance Impaired Loans with Related Allowance Related Allowance for Loan Losses Coverage %(4) Average Balance Interest Income Recognized(5) (Dollars in millions) Commercial and industrial Commercial real . . . . . . . $ 758 $ 89 $ 669 $ 61 $ 608 $ 189 36.7% $ 563 $ 7 estate mortgage— owner occupied . . Commercial real estate construction— owner occupied . . Total 884 91 793 34 759 222 35.4 761 5 39 12 27 1 26 10 56.4 30 — commercial . 1,681 192 1,489 96 1,393 421 36.5 1,354 12 Commercial investor real estate mortgage . . . . . . . Commercial investor real estate construction . . . . . Total investor 22 4 26 41 21 — 4 1,732 143 1,589 63 1,526 397 31.2 1,457 376 56 320 23 86 297 143 52.9 449 1,823 540 35.1 1,906 real estate . . . 2,108 199 1,909 Residential first mortgage . . . . . . . Home equity . . . . . . Indirect . . . . . . . . . . . Other consumer . . . . 1,171 454 1 55 Total 61 14 — — 1,110 — 440 — 1 — 55 — 1,110 440 1 55 163 62 — 1 19.1 16.7 — 1.8 1,086 410 2 61 consumer . . . 1,681 75 1,606 — 1,606 226 17.9 1,559 66 Total impaired loans . . . . . . . . . . . $5,470 $466 $5,004 $182 $4,822 $1,187 30.2% $4,819 $104 (1) Unpaid principal balance represents the contractual obligation due from the customer and includes the net book value plus charge-offs and payments applied. (2) Charge-offs and payments applied represents cumulative partial charge-offs taken, as well as interest payments received that have been applied against the outstanding principal balance. (3) Book value represents the unpaid principal balance less charge-offs and payments applied; it is shown before any allowance for loan losses. (4) Coverage % represents charge-offs and payments applied plus the related allowance as a percent of the (5) unpaid principal balance. Interest income recognized represents interest income on loans modified in a TDR, and are therefore considered impaired, which are on accruing status. 163 Commercial and industrial Commercial real estate mortgage—owner . . . . . . . . . . . . . . . . . . . . . occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate construction—owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . Commercial investor real estate mortgage . . . . . . . . . Commercial investor real estate construction . . . . . . . Total investor real estate . . . . . . . . . . . . . . . . . . . Residential first mortgage . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indirect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total consumer . . . . . . . . . . . . . . . . . . . . . . . . . . Total Impaired Loans As of December 31, 2010 Unpaid Principal Balance(1) Charge- offs and Payments Applied(2) Book Value(3) Related Allowance for Loan Losses (Dollars in millions) Coverage %(4) $ 545 $124 $ 421 $102 41.5% 746 47 1,338 1,693 638 2,331 1,113 378 2 65 1,558 96 16 236 273 150 423 60 13 — — 73 650 31 1,102 1,420 488 1,908 1,053 365 2 65 1,485 167 10 279 319 154 473 126 46 — 1 173 35.3 55.3 38.5 35.0 47.6 38.4 16.7 15.6 — 1.5 15.8 Total impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . $5,227 $732 $4,495 $925 31.7% (1) Unpaid principal balance represents the contractual obligation due from the customer and includes the net book value plus charge-offs and payments applied. (2) Charge-offs and payments applied represents cumulative partial charge-offs taken, as well as interest payments received that have been applied against the outstanding principal balance. (3) Book value represents the unpaid principal balance less charge-offs and payments applied; it is shown before any allowance for loan losses. (4) Coverage % represents charge-offs and payments applied plus the related allowance as a percent of the unpaid principal balance. The average amount of impaired loans was $4.8 billion during 2010. No material amount of interest income was recognized on impaired loans for the years ended December 31, 2010 or 2009. In addition to the impaired loans detailed in the tables above, there were approximately $328 million in non-performing loans classified as held for sale at December 31, 2011, compared to $304 million at December 31, 2010. These loans are primarily investor real estate, where management does not have the intent to hold the loans for the foreseeable future. The loans are carried at the lower of book basis or an amount approximating the fair value which will be recoverable through the loan sale market. During the year ended December 31, 2011, approximately $767 million in primarily non-performing investor real estate loans were transferred to held for sale; this amount is net of charge-offs of $513 million recorded upon transfer. At December 31, 2011 and 2010, non-accrual loans including loans held for sale totaled $2.7 billion and $3.5 billion, respectively. The amount of interest income recognized in 2011, 2010 and 2009 on loans prior to migrating to non-accrual status was approximately $23 million, $47 million and $55 million, respectively. If these loans had been current in accordance with their original terms, approximately $122 million, $165 million and $160 million, respectively, would have been recognized on these loans in 2011, 2010 and 2009. 164 TROUBLED DEBT RESTRUCTURINGS (TDRs) Clarified Accounting Literature In January 2011, the FASB issued accounting guidance temporarily deferring the effective date for public- entity creditors to provide new disclosures, which were addressed in previously issued guidance regarding receivables, for TDRs. The deferred effective date coincided with the effective date for clarified guidance about what constitutes a TDR for creditors, which was issued in April 2011 by the FASB. Regions applied the clarified definition beginning with third quarter financial reporting to all loans modified after January 1, 2011. For consumer loans, as described below, Regions already considered loans modified under the Customer Assistance Program (“CAP”) to be TDRs. Under the CAP, Regions may offer a short-term deferral, a term extension, an interest rate reduction, a new loan product, or a combination of these options. Because such modifications clearly are concessionary in nature, and because the customer documents a hardship in order to participate in the program, Regions concluded that these loans met the TDR definition before the clarified guidance was issued. Accordingly, the guidance did not have a material impact on TDR balances for the consumer portfolio segment. For Regions, the focus of the evaluation of the clarified TDR definition was on workout accommodations, such as renewals and forbearances, for criticized and classified commercial and investor real estate loans. Regions’ business strategy to keep loan maturities short, particularly in the investor real estate portfolio segment, in order to maintain leverage in negotiating with customers drove the renewal activity. Regions often increases or at least maintains the same interest rate, and often receives consideration in exchange for such modifications (e.g., principal paydowns, additional collateral, or additional guarantor support). Therefore, under pre-existing accounting guidance, such modifications were not considered by Regions to be concessionary and were not considered TDRs. However, the new clarification places more emphasis on whether the terms of the modified loan are at a market rate in order to determine if a concession has been made. Under the clarified guidance, a modification is refutably considered by Regions to be a concession if the borrower could not access similar financing at market terms, even if Regions concludes that the borrower will ultimately pay all contractual amounts owed. Therefore, the amount of accruing TDRs increased as a result of the new clarification. As noted above, the original maturities of the notes being modified are relatively short (for example 2-3 years), and the renewed term is typically comparable to the original maturity. Accordingly, Regions considers these modifications to be significant delays in payment. Therefore, extensions must be considered for the TDR determination because the renewed term is significant to the term of the original note. As a result of the TDR designation, all loans modified in a TDR are considered to be impaired, even if they carry an accruing risk rating. Beginning in the third quarter of 2011, for accruing commercial and investor real estate TDRs (as well as for non-accrual commercial and investor real estate loans less than $2.5 million), Regions based the allowance for loan losses on a discounted cash flow analysis performed at the note level, where projected cash flows reflect credit losses based on statistical information derived from loans with similar risk characteristics (e.g., risk rating and product type). For all commercial and investor real estate non-accrual loans equal to or greater than $2.5 million, consistent with historical practice, the allowance for loan losses is based on a specific evaluation, considering the facts and circumstances specific to each obligation. Because Regions’ past practice was to base the allowance for loan losses for commercial and investor real estate loans on loss content based on risk rating and product type, either through specific evaluation of larger loans, or groups of smaller loans with similar risk characteristics, the adoption of the clarification and the corresponding increase in commercial and investor real estate TDRs did not materially impact the overall level of the allowance for loan losses. As noted above, the clarification did not impact the level of TDRs in the consumer portfolio segment or the related allowance for loan losses. Modification Activity: Commercial and Investor Real Estate Portfolio Segments Regions regularly modifies commercial and investor real estate loans in order to facilitate a workout strategy. Typical modifications include workout accommodations, such as renewals and forbearances. The discussion under 165 “Clarified Accounting Literature” above includes additional information related to the business purposes of such modifications. This discussion also includes a description of the impact of the clarification on conclusions regarding TDR designation for these modifications, as well as the impact on the allowance for loan losses. Additionally, as another workout alternative, Regions periodically uses A/B note restructurings when the underlying assets (primarily investor real estate) have a stabilized level of cash flow. An appropriately underwritten A-note will allow for upgraded risk rating, with ultimate return to accrual status upon charge-off of the B-note, and a satisfactory period of performance of the A-note (generally, six months). Regions continues to report A-notes as TDRs, even if upgraded to accrual status. Also, for smaller-dollar commercial customers, Regions may periodically grant interest rate and other term concessions, similar to those under the CAP program as described below. Modification Activity: Consumer Portfolio Segment Regions continues to work to meet the individual needs of consumer borrowers to stem foreclosure through the CAP. Regions designed the program to allow for customer-tailored modifications with the goal of keeping customers in their homes and avoiding foreclosure where possible. Modification may be offered to any borrower experiencing financial hardship—regardless of the borrower’s payment status. Under the CAP, Regions may offer a short-term deferral, a term extension, an interest rate reduction, a new loan product, or a combination of these options. For loans restructured under the CAP, Regions expects to collect the original contractually due principal. The gross original contractual interest may be collectible, depending on the terms modified. The length of the CAP modifications ranges from temporary payment deferrals of three months to term extensions for the life of the loan. All such modifications are considered TDRs regardless of the term if there is a concession to a borrower experiencing financial difficulty. Modified loans are subject to policies governing accrual/non-accrual evaluation consistent with all other loans of the same product type. Consumer loans are subject to objective accrual/non-accrual decisions. Under these policies, loans subject to the CAP are charged down to estimated value on or before the month in which the loan becomes 180 days past due. Beginning in the third quarter of 2011, home equity second liens are charged down to estimated value by the end of the month in which the loan becomes 120 days past due. If a partial charge-off is necessary as a result of this evaluation, the loan is placed on non-accrual at that time. Because the program was designed to evaluate potential CAP participants as early as possible in the life cycle of the troubled loan, many of the modifications are finalized without the borrower ever reaching 180 days past due, and with the loans having never been placed on non-accrual. Accordingly, given the positive impact of the restructuring on the likelihood of recovery of cash flows due under the modified terms, accrual status continues to be appropriate for these loans. None of the modified consumer loans listed in the following TDR disclosures were collateral-dependent at the time of modification. At December 31, 2011, approximately $135 million in residential first mortgage TDRs were in excess of 180 days past due and are considered collateral-dependent. At December 31, 2011 approximately $10 million in home equity first lien TDRs were in excess of 180 days past due and $6 million in home equity second lien TDRs were in excess of 120 days past due and are considered collateral dependent. If loans characterized as TDRs perform according to the restructured terms for a satisfactory period of time, the TDR designation may be removed in a new calendar year if the loan yields a market rate. A minimum of six months’ consecutive payments is required in order to demonstrate a performance history sufficient to remove the TDR designation. The market rate assessment must be made at the date of the modification considering the terms that would be offered to a new borrower with a similar credit profile. Given the types of concessions currently being granted under the CAP as described above, Regions does not expect that the market rate condition will be widely achieved; accordingly, Regions expects loans modified through the CAP to remain identified as TDRs for the remaining term of the loan. Modifications Considered TDRs and Financial Impact The majority of Regions’ 2011 commercial and investor real estate TDRs are the result of renewals where the only concession is that the interest rate at renewal is not considered to be a market rate. Consumer TDRs 166 generally involve an interest rate concession. Accordingly, the financial impact of the modifications is best illustrated by the impact to the allowance calculation at the loan or pool level as a result of the loans being considered impaired due to their status as a TDR. The following table presents loans by class modified in a TDR, and the financial impact of those modifications, for the period presented. Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate mortgage—owner occupied . . . . . . . . . . . . . . . . . . . . Commercial real estate construction—owner occupied . . . . . . . . . . . . . . . . . . Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial investor real estate mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial investor real estate construction . . . . . . . . . . . . . . . . . . . . . . . . . . Total investor real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential first mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indirect and other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2011 Financial Impact of Modifications Considered TDRs Increase in Allowance at Modification Number of Obligors Recorded Investment 986 382 17 1,385 640 282 922 1,536 2,050 975 4,561 6,868 (In millions) $ 670 368 10 1,048 1,493 355 1,848 330 148 13 491 $ 3 8 — 11 14 4 18 42 16 — 58 $3,387 $ 87 As described previously, the consumer modifications granted by Regions are rate concessions and not forgiveness of principal. The majority of the commercial and investor real estate modifications are renewals where there is no reduction in interest rate or forgiveness of principal. Accordingly, Regions most often does not record a charge-off at the modification date. A limited number of modifications included above are A/B note restructurings, where the B-note is charged off. The total charge-offs recorded for all modifications for the year ended December 31, 2011 were less than $10 million. 167 Defaulted TDRs The following table presents TDRs which defaulted during the year ended December 31, 2011, and which were modified in the previous twelve months (i.e., the twelve months prior to the default). For purposes of this disclosure, default is defined as 90 days past due and still accruing for the consumer portfolio segment, and placement on non-accrual status for the commercial and investor real estate portfolio segments. Consideration of defaults in the calculation of the allowance for loan losses is described previously in the description of modifications in each portfolio segment. Defaulted During the Period, Where Modified in a TDR Twelve Months Prior to Default Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate mortgage—owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate construction—owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial investor real estate mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial investor real estate construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total investor real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential first mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2011 (In millions) $ 47 40 1 88 101 12 113 64 17 81 $282 Commercial and investor real estate loans which were on non-accrual status at the time of the latest modification are not included in the default table above, as they are already considered to be in default at the time of the restructuring. At December 31, 2011, approximately $706 million of commercial and investor real estate loans modified in a TDR during 2011 were on non-accrual status. Approximately 24 percent of this amount was 90 days past due. At December 31, 2011, Regions had restructured binding unfunded commitments totaling $210 million where a concession was granted and the borrower was in financial difficulty. NOTE 7. SERVICING OF FINANCIAL ASSETS The fair value of mortgage servicing rights is calculated using various assumptions including future cash flows, market discount rates, expected prepayment rates, servicing costs and other factors. A significant change in prepayments of mortgages in the servicing portfolio could result in significant changes in the valuation adjustments, thus creating potential volatility in the carrying amount of mortgage servicing rights. The table below presents an analysis of mortgage servicing rights for the years ended December 31 under the fair value measurement method: Carrying value, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in fair value: 2011 2010 (In millions) $ 267 62 $247 81 Due to change in valuation inputs or assumptions . . . . . . . . . . . . . . . . . . . . Other changes (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (124) (23) (32) (29) Carrying value, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 182 $267 (1) Represents economic amortization associated with borrower repayments. 168 Data and assumptions used in the fair value calculation, as well as the valuation’s sensitivity to rate fluctuations, related to mortgage servicing rights (excluding related derivative instruments) as of December 31 are as follows: Unpaid principal balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average prepayment speed (CPR; percentage) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated impact on fair value of a 10% increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated impact on fair value of a 20% increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Option-adjusted spread (basis points) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated impact on fair value of a 10% increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated impact on fair value of a 20% increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average coupon interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average remaining maturity (months) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average servicing fee (basis points) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 2010 (Dollars in millions) $25,375 $26,218 $ $ $ $ 27.8% (16) $ (30) $ 235 (1) $ (3) $ 5.22% 281 28.7 13.0% (14) (27) 657 (6) (12) 5.47% 285 28.8 The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of an adverse variation in a particular assumption on the fair value of the mortgage servicing rights is calculated without changing any other assumption, while in reality changes in one factor may result in changes in another, which may either magnify or counteract the effect of the change. The derivative instruments utilized by Regions would serve to reduce the estimated impacts to fair value included in the table above. Regions uses various derivative instruments and/or trading securities to mitigate the effect of changes in the fair value of its mortgage servicing rights in the consolidated statements of operations. The table below presents the impact on the consolidated statements of operations associated with changes in mortgage servicing rights and related derivative and/or trading securities for the years ended December 31: Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital markets and investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (In millions) $ 3 4 16 $— — (22) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (22) $23 $20 4 13 $37 Year Ended December 31 2011 2010 2009 The following table presents servicing related fees, which includes contractually specified servicing fees, late fees and other ancillary income resulting from the servicing of mortgage loans for the years ended December 31: Servicing related fees and other ancillary income . . . . . . . . . . . . . . . . . . . . . . . $85 (In millions) $81 $70 Loans are sold in the secondary market with standard representations and warranties regarding certain characteristics such as the quality of the loan, the absence of fraud, the eligibility of the loan for sale and the future servicing associated with the loan. Regions may be required to repurchase these loans at par, or make- whole or indemnify the purchasers for losses incurred when representations and warranties are breached. Year Ended December 31 2011 2010 2009 169 Regions maintains a repurchase liability related to mortgage loans sold with representations and warranty provisions. This repurchase liability is reported in other liabilities on the consolidated balance sheets and reflects management’s estimate of losses based on historical repurchase and loss trends, as well as other factors that may result in anticipated losses different from historical loss trends. Adjustments to this reserve are recorded in other non-interest expense on the consolidated statements of operations. The table below presents an analysis of Regions’ repurchase liability, related to mortgage loans sold with representations and warranty provisions, for the years ended December 31: Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions/(reductions), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 2010 (In millions) $ 30 $ 32 18 23 (16) (23) Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32 $ 32 During 2011, settled repurchase claims were related to one of the following alleged breaches: 1) underwriting guideline violations; 2) misrepresentation of income, assets or employment; or 3) property valuation not supported. These claims stem primarily from the 2006-2008 vintages. NOTE 8. PREMISES AND EQUIPMENT A summary of premises and equipment at December 31 is as follows: 2011 2010 Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premises and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ (In millions) 492 1,706 1,106 279 425 188 509 1,722 1,115 240 416 173 Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 4,196 (1,821) 4,175 (1,606) $ 2,375 $ 2,569 NOTE 9. INTANGIBLE ASSETS GOODWILL Goodwill allocated to each reportable segment as of December 31 is presented as follows: Banking/Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment Banking/Brokerage/Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,691 — 125 $4,691 745 125 $4,816 $5,561 2011 2010 (In millions) 170 A summary of goodwill activity at December 31 is presented as follows: Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisitions of other businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment 2011 2010 (In millions) $5,561 — (745) $5,557 4 — Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,816 $5,561 As stated in Note 1, Regions evaluates each reporting unit’s goodwill for impairment on an annual basis in the fourth quarter, or more often if events or circumstances indicate that there may be impairment. Adverse changes in the economic environment, declining operations, or other factors could result in a decline in the implied fair value of goodwill. A goodwill impairment test includes two steps. Step One, used to identify potential impairment, compares the estimated fair value of a reporting unit with its carrying amount, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. Step Two of the goodwill impairment test compares the implied estimated fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of goodwill for that reporting unit exceeds the implied fair value of that unit’s goodwill, an impairment loss is recognized in an amount equal to that excess. Regions tested goodwill for impairment periodically during 2011, 2010 and 2009. Due to the deteriorated economic environment in the three years ended December 31, 2011, Regions performed annual impairment tests in the fourth quarters of these periods and interim impairment tests in each quarter of 2011 and 2010 and during the second and third quarters of 2009. The results of these interim and annual tests indicated that goodwill was not impaired as of these test dates, except for the impairment in the Investment Banking/Brokerage/Trust segment during the fourth quarter of 2011. In the fourth quarter of 2011, Regions assessed the indicators of goodwill impairment for all three reporting units as part of its annual impairment test, as of October 1, 2011, and through the date of the filing of the Annual Report on Form 10-K for the year ended December 31, 2011. The indicators assessed included: • Recent operating performance, • Changes in market capitalization, • Regulatory actions and assessments, • Changes in the business climate (including legislation, legal factors and competition), • Company-specific factors (including changes in key personnel, asset impairments, and business dispositions), and • Trends in the banking industry. For purposes of performing Step One of the goodwill impairment test, Regions uses both the income and market approaches to value its reporting units. The income approach, which is the primary valuation approach, consists of discounting projected long-term future cash flows, which are derived from internal forecasts and economic expectations for the respective reporting units. The significant inputs to the income approach include expected future cash flows, the long-term target tangible equity to tangible assets ratio, and the discount rate. Regions utilizes the capital asset pricing model (“CAPM”) in order to derive the base discount rate used in the income approach The inputs to the CAPM include the 20-year risk-free rate, 5-year beta for a select peer set, and the market risk premium based on published data. Once the output of the CAPM is determined, a size premium is added (also based on a published source) as well as a company-specific risk premium, which is an 171 estimate determined by the Company and meant to compensate for the risk inherent in the future cash flow projections and inherent differences (such as business model and market perception of risk) between Regions and the peer set. Regions uses the public company method and the transaction method as the two market approaches. The public company method applies a value multiplier derived from each reporting unit’s peer group to a financial metric of the reporting unit (e.g. last twelve months of earnings before interest, taxes and depreciation, tangible book value, etc.) and control premium to the respective reporting unit. The control premium is evaluated and compared to similar financial services transactions considering the absolute and relative potential revenue synergies and cost savings. The transaction method applies a value multiplier to a financial metric of the reporting unit based on comparable observed purchase transactions in the financial services industry for the reporting unit (where available). Regions uses the output from these approaches to determine the estimated fair value of each reporting unit. Listed in the tables below are assumptions used in estimating the fair value of each reporting unit. The tables include the discount rate used in the income approach, the market multiplier used in the market approaches, and the public company method control premium applied to all reporting units. As of Fourth Quarter 2011 Discount rate used in income approach . . . . . . . . . . . . . . . . . . . . . . . . . Public company method market multiplier(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transaction method market multiplier(2) Banking/ Treasury 15% 0.7x 1.1x Investment Banking/ Brokerage/Trust 15% 1.4x 1.5x Insurance 11% 13.0x n/a (1) For the Banking/Treasury and Investment Banking/Brokerage/Trust reporting units, these multipliers are applied to tangible book value. For the Insurance reporting unit, this multiplier is applied to the last twelve months of net income. In addition to the multipliers, a 55 percent control premium is assumed for the Banking/Treasury reporting unit. A 20 percent control premium is assumed for the Investment Banking/ Brokerage/Trust reporting unit and a 30 percent control premium for the Insurance reporting unit. (2) For the Banking/Treasury and Investment Banking/Brokerage/Trust reporting units, these multipliers are applied to tangible book value. As of Fourth Quarter 2010 Discount rate used in income approach . . . . . . . . . . . . . . . . . . . . . . . . . . Public company method market multiplier(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transaction method market multiplier(2) Banking/ Treasury 15% 1.0x 1.3x Investment Banking/ Brokerage/ Trust 14% 1.6x 2.1x Insurance 11% 17.3x n/a (1) For the Banking/Treasury and Investment Banking/Brokerage/Trust reporting units, these multipliers are applied to tangible book value. For the Insurance reporting unit, this multiplier is applied to the last twelve months of net income. In addition to the multipliers, a 30 percent control premium is assumed for each reporting unit. (2) For the Banking/Treasury and Investment Banking/Brokerage/Trust reporting units, these multipliers are applied to tangible book value. In the latter half of 2011, Regions experienced a significant decline in market capitalization relative to prior periods. The large-cap banking sector also experienced a decline in market capitalization albeit not as significant as that of Regions. This resulted in price-to-tangible book values declining and resulted in an overall value conclusion for the Banking/Treasury reporting unit that would be indicative of a distressed sale in the public company method. Accordingly, Regions increased the control premium utilized in that method from 30 percent used in 2010 to 55 percent in the test conducted in the fourth quarter of 2011. 172 For the Investment Banking/Brokerage/Trust reporting unit, Regions performed and passed Step One of the goodwill impairment test as of the annual test date in the fourth quarter. Subsequent to that test, Regions received bids from buyers interested in purchasing the Morgan Keegan component of the Investment Banking/Brokerage/ Trust reporting unit; these bids were significantly below the value indications received from bidders as of October 1, 2011. The collapse and bankruptcy of a large brokerage firm and subsequent market disruptions that occurred in November of 2011 impacted the significant price declines related to this component. Accordingly, Regions tested the goodwill of the Investment Banking/Brokerage/Trust reporting unit as of December 15, 2011 resulting in the reporting unit failing Step One. As a result, Regions conducted Step Two for this reporting unit, which indicated impairment of all of the $745 million of goodwill allocated to the Investment Banking/ Brokerage/Trust reporting unit. Apart from the observed decline in the equity value of the reporting unit, the primary drivers of the impairment were recognition of customer and other identifiable intangibles in Step Two that are not required to be recognized in the GAAP financial statements of the reporting unit but must be calculated in the Step Two process. The pre-tax $745 million impairment charge was allocated between continuing operations ($253 million) and discontinued operations ($492 million) based on relative fair values of the equity of the two components of the reporting unit derived in Step One. The goodwill impairment charge is a non-cash item that does not have an adverse impact on regulatory capital. The valuation methodologies of certain material financial assets and liabilities are discussed in Note 1. OTHER INTANGIBLES Other intangibles consist of core deposit intangibles, purchased credit card relationship assets, and customer relationship and employment agreement assets. A summary of core deposit intangible assets at December 31 is presented as follows: Balance at beginning of year, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated amortization, beginning of year . . . . . . . . . . . . . . . . . . . Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 2010 (In millions) $ 354 (657) (95) $ 461 (550) (107) Accumulated amortization, end of year . . . . . . . . . . . . . . . . . . . . . . . . (752) (657) Balance at end of year, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 259 $ 354 Regions’ core deposit intangible assets are being amortized on an accelerated basis over a ten-year period. A summary of Regions’ other intangible assets as of December 31, 2011 and 2010 is presented as follows: Net Book Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current Year Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 2010 (In millions) $31 $190 13 20 These other intangible assets resulted from customer relationships and employment agreements related to various acquisitions and are being amortized primarily on an accelerated basis over a period ranging from two to fifteen years. On June 30, 2011, Regions purchased approximately $1.1 billion of credit card receivables of Regions’ existing customers from FIA Card Services. As a result of the transaction, Regions recognized approximately $175 million of purchased credit card relationships, which began amortizing over a fifteen year life on an accelerated basis. 173 The aggregate amount of amortization expense for core deposit intangible assets, credit card intangibles, and other intangible assets is estimated as follows: 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31 (In millions) $109 94 79 62 22 Identifiable intangible assets other than goodwill are reviewed at least annually, usually in the fourth quarter, for events or circumstances that could impact the recoverability of the intangible asset. These events could include loss of core deposits, significant losses of credit card accounts and/or balances, increased competition or adverse changes in the economy. To the extent other identifiable intangible assets are deemed unrecoverable, impairment losses are recorded in other non-interest expense to reduce the carrying amount. Regions noted no indicators of impairment for all other identifiable intangible assets. NOTE 10. DEPOSITS The following schedule presents a detail of interest-bearing deposits at December 31: Savings accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest-bearing transaction accounts . . . . . . . . . . . . . . . . . . . . . . . . . . Money market accounts—domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market accounts—foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate treasury time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 2010 (In millions) $ 5,159 19,388 23,053 378 19,378 67,356 5 $ 4,668 13,423 27,420 569 22,784 68,864 17 $67,361 $68,881 The aggregate amount of time deposits of $100,000 or more, including certificates of deposit of $100,000 or more, was $7.7 billion and $8.9 billion at December 31, 2011 and 2010, respectively. At December 31, 2011, the aggregate amount of maturities of all time deposits (deposits with stated maturities, consisting primarily of certificates of deposit and IRAs) were as follows: 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31 (In millions) $12,313 4,272 699 1,080 995 24 $19,383 174 NOTE 11. SHORT-TERM BORROWINGS Following is a summary of short-term borrowings at December 31: Company funding sources: Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . Treasury, tax and loan notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customer-related borrowings: Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . Brokerage customer liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-sale liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customer collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 2010 (In millions) $ 18 969 — — 29 $ 19 763 500 118 95 1,016 1,495 1,346 394 256 55 2,051 1,934 324 174 10 2,442 $3,067 $3,937 COMPANY FUNDING SOURCES The levels of federal funds purchased and securities sold under agreements to repurchase can fluctuate significantly on a day-to-day basis, depending on funding needs and which sources are used to satisfy those needs. All such arrangements are considered typical of the banking and brokerage industries and are accounted for as borrowings. Federal funds purchased had weighted-average maturities of 4 days and 3 days at December 31, 2011, and 2010, respectively. Weighted-average rates paid during 2011, 2010 and 2009 were 0.1%, 0.1% and 0.2%, respectively. Securities sold under agreements to repurchase had weighted-average maturities of 48 days and 27 days at December 31, 2011, and 2010, respectively. Weighted-average rates paid during 2011, 2010 and 2009 were (0.6%), 0.2% and 0.9%, respectively. The negative weighted-average interest rates on securities sold under agreements to repurchase during 2011 were the result of, in part, Regions’ entering into reverse-repurchase agreements. There are times when financing costs associated with these transactions are lower than typical repurchase agreement rates as a result of a supply and demand imbalance in particular collateral. Since short-term repurchase agreement rates were close to zero during the last half of 2011, the supply and demand imbalance related to securities that Regions owned led to negative financing rates. As another source of funding, the Company utilizes short-term borrowings through the issuance of FHLB advances. FHLB borrowings are used to satisfy short-term and long-term borrowing needs and can also fluctuate between periods. See Note 12 for further discussion of Regions’ borrowing capacity with the FHLB. Treasury, tax and loan notes consist of borrowings from the Federal Reserve Bank. At December 31, 2011, Regions could borrow a maximum amount of approximately $19.4 billion from the Federal Reserve Bank Discount Window. See Note 5 for loans pledged to the Federal Reserve Bank at December 31, 2011 and 2010. Other short-term borrowings are related to Morgan Keegan and include borrowings under certain lines of credit that Morgan Keegan maintains with unaffiliated banks. The lines of credit provided for maximum borrowings of $640 million at both December 31, 2011 and 2010. 175 CUSTOMER-RELATED BORROWINGS Repurchase agreements are also offered as commercial banking products as short-term investment opportunities for customers. At the end of each business day, customer balances are swept into the agreement account. In exchange for cash, Regions sells the customer securities with a commitment to repurchase them on the following business day. The repurchase agreements are collateralized to allow for market fluctuations. Securities from Regions Bank’s investment portfolio are used as collateral. From the customer’s perspective, the investment earns more than a traditional money market instrument. From Regions’ standpoint, the repurchase agreements are similar to deposit accounts, although they are not insured by the FDIC or guaranteed by the United States or agencies. Regions Bank does not manage the level of these investments on a daily basis as the transactions are initiated by the customers. The level of these borrowings can fluctuate significantly on a day-to-day basis. Regions, through Morgan Keegan, maintains two types of liabilities for its brokerage customers that are classified as short-term borrowings since Morgan Keegan pays its customers interest related to these liabilities. The brokerage customer position liability represents liquid funds in the customers’ brokerage accounts. The short-sale liability represents Regions’ trading obligations to deliver to customers securities at a predetermined date and price. The balances of these liabilities fluctuate frequently based on customer activity. Customer collateral includes cash collateral posted by customers related to derivative transactions by swap customers of Morgan Keegan. NOTE 12. LONG-TERM BORROWINGS Long-term borrowings at December 31 consist of the following: Regions Financial Corporation (Parent): LIBOR floating rate senior notes due June 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.875% senior notes due April 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.75% senior notes due November 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.75% senior notes due June 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.75% subordinated notes due March 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.00% subordinated notes due March 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.375% subordinated notes due May 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.75% subordinated notes due September 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.75% subordinated debentures due November 2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.375% subordinated notes due December 2037 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.625% junior subordinated notes due May 2047 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.875% junior subordinated notes due June 2048 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation adjustments on hedged long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regions Bank: Federal Home Loan Bank structured advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.25% senior bank notes due December 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.85% subordinated notes due April 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.20% subordinated notes due April 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.50% subordinated notes due May 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.45% subordinated notes due June 2037 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation adjustments on hedged long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 2010 (In millions) $ 350 249 694 496 — — 600 100 162 300 498 345 6 87 3,887 — 1,914 — 497 347 750 497 175 43 4,223 $8,110 $ 350 249 692 495 502 500 599 100 162 300 498 345 7 108 4,907 200 3,515 2,000 494 347 750 497 376 104 8,283 $13,190 176 As of December 31, 2011, Regions had eight issuances of subordinated notes totaling $3.3 billion, with stated interest rates ranging from 4.85% to 7.75%. All issuances of these notes are, by definition, subordinated and subject in right of payment of both principal and interest to the prior payment in full of all senior indebtedness of the Company, which is generally defined as all indebtedness and other obligations of the Company to its creditors, except subordinated indebtedness. Payment of the principal of the notes may be accelerated only in the case of certain events involving bankruptcy, insolvency proceedings or reorganization of the Company. In March of 2011, approximately $1.0 billion of subordinated notes matured. The subordinated notes described above qualify as Tier 2 capital under Federal Reserve guidelines. None of the subordinated notes are redeemable prior to maturity. In October 2008, the Federal Deposit Insurance Corporation (“FDIC”) announced a new program—the Temporary Liquidity Guarantee Program (“TLGP”)—to strengthen confidence and encourage liquidity in the banking system by guaranteeing newly issued senior unsecured debt of banks, thrifts and certain holding companies, and by providing full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount. In December 2008, Regions Bank completed an offering of $3.75 billion of qualifying senior bank notes covered by the TLGP. In December 2011, the remaining $2 billion of this offering matured. Regions has outstanding approximately $843 million of junior subordinated notes (“JSNs”) to affiliated trusts, which contemporaneously issued trust preferred securities which Regions guaranteed. During 2011, all FHLB structured advances matured. The FHLB structured advances had weighted-average interest rates of 2.5% and 3.1% at December 31, 2010 and 2009, respectively. Other FHLB advances at December 31, 2011, 2010 and 2009 had a weighted-average interest rate of 1.0%, 1.0% and 3.4%, respectively, with maturities ranging from one to twenty years. FHLB borrowings are contingent upon the amount of collateral pledged to the FHLB. Regions has pledged certain residential first mortgage loans on one-to-four family dwellings and home equity lines of credit as collateral for the FHLB advances outstanding. See Note 5 for loans pledged to the FHLB at December 31, 2011 and 2010. Additionally, membership in the FHLB requires an institution to hold FHLB stock, and Regions held $219 million at December 31, 2011 and $419 million at December 31, 2010. During 2010, Regions prepaid approximately $2 billion of FHLB advances, realizing a $108 million pre-tax loss on early extinguishment. These extinguishments were part of the company’s asset/liability management process. Regions’ borrowing availability with the FHLB as of December 31, 2011, based on assets available for collateral at that date, was $5.4 billion. Other long-term debt at December 31, 2011, 2010 and 2009 had weighted-average interest rates of 5.0%, 2.6% and 2.9%, respectively, and a weighted-average maturity of 10.9 years at December 31, 2011. Regions has $55 million included in other long-term debt in connection with a seller-lessee transaction. Regions uses derivative instruments, primarily interest rate swaps, to manage interest rate risk by converting a portion of its fixed-rate debt to a variable-rate. The effective rate adjustments related to these hedges are included in interest expense on long-term borrowings. The weighted-average interest rate on total long-term debt, including the effect of derivative instruments, was 3.3%, 3.2% and 3.6% for the years ended December 31, 2011, 2010 and 2009, respectively. Further discussion of derivative instruments is included in Note 20. 177 The aggregate amount of contractual maturities of all long-term debt in each of the next five years and thereafter is as follows: 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31 Regions Financial Corporation (Parent) Regions Bank (In millions) $ 951 250 695 496 — 1,495 $3,887 $ 902 498 1,001 348 2 1,472 $4,223 In February 2010, Regions filed a shelf registration statement with the U.S. Securities and Exchange Commission. This shelf registration does not have a capacity limit and can be utilized by Regions to issue various debt and equity securities. The registration statement will expire in February 2013. Regions’ Bank Note program allows Regions Bank to issue up to $20 billion aggregate principal amount of bank notes outstanding at any one time. No issuances have been made under this program as of December 31, 2011. Notes issued under the program may be senior notes with maturities from 30 days to 15 years and subordinated notes with maturities from 5 years to 30 years. These notes are not deposits and they are not insured or guaranteed by the FDIC. Regions may, from time to time, consider opportunistically retiring outstanding issued securities, including subordinated debt, trust preferred securities and preferred shares in privately negotiated or open market transactions for cash or common shares. NOTE 13. REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS Regions and Regions Bank are required to comply with regulatory capital requirements established by Federal banking agencies. These regulatory capital requirements involve quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items, and also qualitative judgments by the regulators. Failure to meet minimum capital requirements can subject the Company to a series of increasingly restrictive regulatory actions. Currently, there are two basic measures of capital adequacy: a risk-based measure and a leverage measure. The risk-based capital requirements are designed to make regulatory capital requirements more sensitive to differences in credit and market risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and interest rate risk, and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with specified risk-weighting factors. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. Banking organizations that are considered to have excessive interest rate risk exposure are required to maintain higher levels of capital. The minimum standard for the ratio of total capital to risk-weighted assets is 8 percent. At least 50 percent of that capital level (which equates to a 4 percent minimum) must consist of common equity, undivided profits and non-cumulative perpetual preferred stock, senior perpetual preferred stock issued to the U.S. Treasury under the Capital Purchase Program, minority interests relating to qualifying common or noncumulative perpetual preferred stock issued by a consolidated U.S. depository institution or foreign bank subsidiary, less goodwill, disallowed deferred tax assets and certain other intangibles (“Tier 1 capital”). The remainder (“Tier 2 capital”) 178 may consist of a limited amount of other preferred stock, mandatorily convertible securities, subordinated debt, and a limited amount of the allowance for loan losses. The sum of Tier 1 capital and Tier 2 capital is “total risk- based capital” or total capital. However, under the Collins Amendment, that was passed as a section of the Dodd- Frank Act, trust preferred securities will be eliminated as an element of Tier 1 capital. This disallowance of trust preferred securities will be phased in from January 1, 2013 to January 1, 2016. Debt or equity instruments issued to the Federal government as part of the CPP are exempt from the Collins Amendment. As of December 31, 2011, Regions had $846 million of trust preferred securities that are subject to the Collins Amendment and $3.5 billion of preferred equity that is exempt from the Collins Amendment. The minimum guidelines to be considered well capitalized for Total capital and Tier 1 capital are 10 percent and 6 percent, respectively. As of December 31, 2011 and 2010, the most recent notification from Federal banking agencies categorized Regions and its significant subsidiaries as well capitalized under the regulatory framework. The Company believes that no changes in conditions or events have occurred since December 31, 2011, which would result in changes that would cause Regions or Regions Bank to fall below the well capitalized level. The banking regulatory agencies also have adopted regulations that supplement the risk-based guidelines to include a minimum ratio of 3 percent of Tier 1 capital to average assets less goodwill and disallowed deferred tax assets (the “Leverage ratio”). Depending upon the risk profile of the institution and other factors, the regulatory agencies may require a Leverage ratio of 1 percent to 2 percent above the minimum 3 percent level. The following tables summarize the applicable holding company and bank regulatory capital requirements. Regions’ capital ratios at December 31, 2011 and 2010 exceeded all regulatory requirements. December 31, 2011 Amount Ratio Minimum Requirement To Be Well Capitalized (Dollars in millions) Tier 1 capital: Regions Financial Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . Regions Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,139 11,623 13.28% 4.00% 12.86 4.00 6.00% 6.00 Total capital: Regions Financial Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . Regions Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,538 14,447 16.99% 8.00% 15.98 8.00 10.00% 10.00 Leverage(1) : Regions Financial Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . Regions Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,139 11,623 9.91% 3.00% 9.76 3.00 5.00% 5.00 (1) The Leverage ratio requires an additional 100 to 200 basis-point cushion, in certain circumstances, of adjusted quarterly average assets. December 31, 2010 Amount Ratio Minimum Requirement To Be Well Capitalized (Dollars in millions) Tier 1 capital: Regions Financial Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . Regions Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,775 10,971 12.40% 4.00% 11.68 4.00 6.00% 6.00 Total capital: Regions Financial Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . Regions Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,527 14,028 16.35% 8.00% 14.93 8.00 10.00% 10.00 Leverage(1) : Regions Financial Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . Regions Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,775 10,971 9.30% 3.00% 8.85 3.00 5.00% 5.00 (1) The Leverage ratio requires an additional 100 to 200 basis-point cushion, in certain circumstances, of adjusted quarterly average assets. 179 Substantially all net assets are owned by subsidiaries. The primary source of operating cash available to Regions is provided by dividends from subsidiaries. Statutory limits are placed on the amount of dividends the subsidiary bank can pay without prior regulatory approval. In addition, regulatory authorities require the maintenance of minimum capital-to-asset ratios at banking subsidiaries. Under the Federal Reserve’s Regulation H, Regions Bank may not, without approval of the Federal Reserve, declare or pay a dividend to Regions if the total of all dividends declared in a calendar year exceeds the total of (a) Regions Bank’s net income for that year and (b) its retained net income for the preceding two calendar years, less any required transfers to additional paid-in capital or to a fund for the retirement of preferred stock. Under Alabama law, Regions Bank may not pay a dividend to Regions in excess of 90 percent of its net earnings until the bank’s surplus is equal to at least 20 percent of capital. Regions Bank is also required by Alabama law to seek the approval of the Alabama Superintendent of Banking prior to the payment of dividends if the total of all dividends declared by Regions Bank in any calendar year will exceed the total of (a) Regions Bank’s net earnings for that year, plus (b) its retained net earnings for the preceding two years, less any required transfers to surplus. The statute defines net earnings as “the remainder of all earnings from current operations plus actual recoveries on loans and investments and other assets, after deducting from the total thereof all current operating expenses, actual losses, accrued dividends on preferred stock, if any, and all federal, state and local taxes.” Regions Bank cannot, without approval from the Federal Reserve and the Alabama Superintendent of Banking, declare or pay a dividend to Regions unless Regions Bank is able to satisfy the criteria discussed in the preceding sentences. In addition to dividend restrictions, Federal statutes also prohibit unsecured loans from banking subsidiaries to the parent company. In addition, Regions must adhere to various U.S. Department of Housing and Urban Development (“HUD”) regulatory guidelines including required minimum capital to maintain their Federal Housing Administration approved status. Failure to comply with the HUD guidelines could result in withdrawal of this certification. As of December 31, 2011, Regions was in compliance with HUD guidelines. Regions is also subject to various capital requirements by secondary market investors. NOTE 14. STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS) On November 14, 2008, Regions completed the sale of 3.5 million shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, to the U.S. Treasury as part of the Capital Purchase Program (“CPP”). Regions will pay the U.S. Treasury on a quarterly basis a 5 percent dividend, or $175 million annually, for each of the first five years of the investment, and 9 percent thereafter unless Regions redeems the shares. As part of its purchase of the preferred securities, the U.S. Treasury also received a warrant to purchase 48.3 million shares of Regions’ common stock at an exercise price of $10.88 per share, subject to anti-dilution and other adjustments. The warrant expires ten years from the issuance date. Regions received $3.5 billion from issuance of the Series A preferred shares and the warrant; the warrant is recorded in additional paid-in capital. The fair value allocation of the $3.5 billion between the preferred shares and the warrant resulted in $3.304 billion allocated to the preferred shares and $196 million allocated to the warrant. Accrued dividends on the Series A preferred shares reduced retained earnings by $175 million in 2011, 2010 and 2009. The unamortized discount on the preferred shares was $81 million and $120 million at December 31, 2011 and 2010, respectively. Discount accretion on the preferred shares reduced retained earnings by $39 million during 2011, $37 million in 2010 and $36 million in 2009. Both the preferred securities and the warrant are accounted for as components of Regions’ regulatory Tier 1 capital. On May 20, 2009 the Company issued 287,500 shares of mandatorily convertible preferred stock, Series B (“Series B shares”), generating net proceeds of approximately $278 million. Accrued dividends on the Series B shares reduced retained earnings by $12 million and $19 million during 2010 and 2009, respectively. In November 2009, a single investor converted approximately 20,000 Series B shares to common shares as allowed under the original transaction documents. On June 18, 2010, as allowed by the terms of the Series B shares, Regions initiated an early conversion of all of the remaining outstanding Series B shares. Dividends accrued and unpaid at the conversion date were settled through issuance of common shares in accordance with the original document. Approximately 63 million common shares were issued in the conversion and dividend settlement. No Series B shares were outstanding at December 31, 2011 or 2010. 180 On May 20, 2009, the Company announced a public equity offering and issued 460 million shares of common stock at $4 per share, generating proceeds of $1.8 billion, net of issuance costs. In addition to the offerings mentioned above, the Company also exchanged approximately 33 million common shares for $202 million of outstanding 6.625 percent trust preferred securities issued by Regions Financing Trust II (“the Trust”) in the second quarter of 2009. The trust preferred securities were exchanged for junior subordinated notes issued by the Company to the Trust. The Company recognized a pre-tax gain of approximately $61 million on the extinguishment of the junior subordinated notes. The increase in shareholders’ equity related to the debt for common share exchange was approximately $135 million, net of issuance costs. At December 31, 2011, there were approximately 46,530,000 shares reserved for issuance under stock compensation plans. Stock options outstanding represent approximately 46,351,000 shares and approximately 179,000 shares are reserved for issuance under deferred compensation plans. The Board of Directors declared a $0.04 annual cash dividend for 2011 and 2010, compared to $0.13 in 2009. Regions does not expect to increase its quarterly dividend above the current $0.01 per common share for the foreseeable future. Comprehensive income (loss) is the total of net income (loss) and all other non-owner changes in equity. Items that are to be recognized under accounting standards as components of comprehensive income (loss) are displayed in the consolidated statements of changes in stockholders’ equity. In the calculation of comprehensive income (loss), certain reclassification adjustments are made to avoid double-counting items that are displayed as part of net income (loss) for a period that also had been displayed as part of other comprehensive income (loss) in that period or earlier periods. The reconciliations of net income (loss) to comprehensive income (loss) are presented on a consolidated basis, including income (loss) from continuing operations and income (loss) from discontinued operations for all periods presented. There are no comprehensive income (loss) items within discontinued operations, other than net income (loss). The disclosure of the reclassification amount for the years ended December 31 is as follows: Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized holding gains and losses on securities available for sale arising during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: reclassification adjustments for net securities gains realized in net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change in unrealized gains and losses on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized holding gains and losses on derivatives arising during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: reclassification adjustments for net gains realized in net income . . . Net change in unrealized gains and losses on derivative instruments . . . . Net actuarial gains and losses arising during the period . . . . . . . . . . . . . . . Less: amortization of actuarial loss and prior service credit realized in net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 506 112 394 325 174 151 (192) 45 2011 Before Tax Tax Effect Net of Tax $(247) (In millions) $ 32 $(215) (189) (39) (150) (123) (66) (57) 74 (16) 90 317 73 244 202 108 94 (118) 29 (147) Net change from defined benefit plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . (237) Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61 $ (85) $ (24) 181 Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized holding gains and losses on securities available for sale 2010 Before Tax Tax Effect Net of Tax $ (885) (In millions) $ 346 $(539) arising during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 (21) Less: reclassification adjustments for net securities gains realized in net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 394 (138) 62 256 Net change in unrealized gains and losses on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (311) 117 (194) Net unrealized holding gains and losses on derivatives arising during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9) 3 (6) Less: reclassification adjustments for net gains realized in net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change in unrealized gains and losses on derivative instruments . . . . Net actuarial gains and losses arising during the period . . . . . . . . . . . . . . . Less: amortization of actuarial loss and prior service credit realized in net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change from defined benefit plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259 (268) (5) 44 (49) (99) 102 4 (15) 19 160 (166) (1) 29 (30) Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,513) $ 584 $(929) Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized holding gains and losses on securities available for sale 2009 Before Tax Tax Effect Net of Tax $(1,202) (In millions) $ 171 $(1,031) arising during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 515 (193) Less: reclassification adjustments for net securities gains realized in net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 (24) Net change in unrealized gains and losses on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized holding gains and losses on derivatives arising during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: reclassification adjustments for net gains realized in net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change in unrealized gains and losses on derivative instruments . . . . Net actuarial gains and losses arising during the period . . . . . . . . . . . . . . . Less: amortization of actuarial loss and prior service credit realized in net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change from defined benefit plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 446 147 362 (215) 57 44 13 (169) (56) (138) 82 (20) (15) (5) 322 45 277 91 224 (133) 37 29 8 Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (958) $ 79 $ (879) 182 NOTE 15. EARNINGS (LOSS) PER COMMON SHARE The following table sets forth the computation of basic earnings (loss) per common share and diluted earnings (loss) per common share for the years ended December 31: 2011 2010 (In millions, except per share amounts) 2009 Numerator: Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Preferred stock dividends and accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 189 (214) $ (468) $(1,074) (230) (224) Income (loss) from continuing operations available to common shareholders . . Income (loss) from discontinued operations, net of tax . . . . . . . . . . . . . . . . . . . . (25) (404) (692) (71) (1,304) 43 Net income (loss) available to common shareholders . . . . . . . . . . . . . . . . . . . . . $ (429) $ (763) $(1,261) Denominator: Weighted-average common shares outstanding—basic and diluted . . . . . . . . . . 1,258 1,227 989 Earnings (loss) per common share from continuing operations(1): Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.02) $ (0.56) $ (1.32) (1.32) (0.56) (0.02) Earnings (loss) per common share from discontinued operations(1): Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.32) (0.32) (0.06) (0.06) 0.04 0.04 Earnings (loss) per common share(1): Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.34) (0.34) (0.62) (0.62) (1.27) (1.27) (1) Certain per share amounts may not appear to reconcile due to rounding. Basic and diluted weighted-average common shares outstanding for earnings per common share from continuing operations and in total are the same for all years presented due to net losses. For earnings per common share from discontinued operations, basic and diluted weighted-average common shares outstanding are the same for the 2011 and 2010 periods due to net losses. For the 2009 period, diluted earnings per common share from discontinued operations are calculated using a denominator of 1,051 million shares, which includes 62 million potential common shares, due to net income. As discussed in Note 14, approximately 63 million common shares were issued in June of 2010 in connection with the conversion of the remaining Series B mandatorily convertible preferred shares, which were originally issued in May 2009. Under applicable accounting literature, such shares should be included in the denominator in arriving at diluted earnings per share as if they were issued at the beginning of the reporting period or as of the date issued, if later. Prior to conversion, these shares were not included in the computation above as such amounts would have had an antidilutive effect on earnings (loss) per common share. NOTE 16. SHARE-BASED PAYMENTS Regions has long-term incentive compensation plans that permit the granting of incentive awards in the form of stock options, restricted stock, restricted stock awards and units, and/or stock appreciation rights. While Regions has the ability to issue stock appreciation rights, none have been issued to date. The terms of all awards issued under these plans are determined by the Compensation Committee of the Board of Directors; however, no awards may be granted after the tenth anniversary from the date the plans were initially approved by shareholders. Options and restricted stock usually vest based on employee service, generally within three years from the date of the grant. The contractual lives of options granted under these plans range from seven to ten years from the date of the grant. 183 On May 13, 2010, the shareholders of the Company approved the Regions Financial Corporation 2010 Long-Term Incentive Plan (“2010 LTIP”), which permits the Company to grant to employees and directors various forms of incentive compensation. These forms of incentive compensation are similar to the types of compensation approved in prior plans. The 2010 LTIP authorizes 100 million common share equivalents available for grant, where grants of options count as one share equivalent and grants of full value awards (e.g., shares of restricted stock and restricted stock units) count as 2.25 share equivalents. Unless otherwise determined by the Compensation Committee of the Board of Directors, grants of restricted stock and restricted stock units accrue dividends as they are declared by the Board of Directors, and the dividends are paid upon vesting of the award. The 2010 LTIP closed all prior long-term incentive plans to new grants, and accordingly, prospective grants must be made under the 2010 LTIP or a successor plan. All existing grants under prior long-term incentive plans were unaffected by this amendment. The number of remaining share equivalents available for future issuance under the 2010 LTIP was approximately 84 million at December 31, 2011. Grants of performance-based restricted stock typically have a one-year performance period, after which shares vest within three years after the grant date. Restricted stock units, which were granted in 2008, have a vesting period of five years. Generally, the terms of these plans stipulate that the exercise price of options may not be less than the fair market value of Regions’ common stock at the date the options are granted; however, under prior stock option plans, non-qualified options could be granted with a lower exercise price than the fair market value of Regions’ common stock on the date of grant. The contractual life of options granted under these plans ranges from seven to ten years from the date of grant. Regions issues new shares from authorized reserves upon exercise. Grantees of restricted stock awards or units must either remain employed with the Company for certain periods from the date of grant in order for shares to be released or issued or retire after meeting the standards of a retiree, at which time shares would be prorated and released. The following table summarizes the elements of compensation cost recognized in the consolidated statements of operations for the years ended December 31: Compensation cost of share-based compensation awards: Restricted stock awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash-settled restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax benefits related to compensation cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation cost of share-based compensation awards, net of tax . . . . . . . . . 2011 2010 2009 (In millions) $10 9 3 (8) $14 $ 10 13 7 (11) $ 33 14 3 (18) $ 19 $ 32 Note: The table above includes compensation cost of share-based compensation awards from discontinued operations of approximately $1 million, net of tax, for years 2011, 2010 and 2009 (see Note 3 to the consolidated financial statements) . STOCK OPTIONS During 2011 and 2010, Regions made stock option grants that vest based upon a service condition. The fair value of these stock options was estimated on the date of the grant using a Black-Scholes option pricing model and related assumptions. The stock options vest ratably over a three-year term. During 2009, Regions made stock option grants from prior long-term incentive plans that vest based upon a service condition and a market condition in addition to awards that were similar to prior grants. The fair value of these stock options was estimated on the date of the grant using a Monte-Carlo simulation method. The simulation generates a defined number of stock price paths in order to develop a reasonable estimate of the range of future expected stock prices and minimize standard error. 184 The following table summarizes the weighted-average assumptions used and the weighted-average estimated fair values related to stock options granted during the years ended December 31: Expected option life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.8yrs. 5.8 yrs. 6.8 yrs. 75.5% 74.0% 67.2% 1.8% 2.2% 2.3% 2.8% 2.2% 2.0% $3.66 $3.86 $1.79 2011 2010 2009 Refer to Note 1 for a discussion of the methodologies used to derive the underlying assumptions used in the Black-Scholes option pricing model. The stock option awards granted during 2011 and 2010 were granted to a broader pool of employees than the 2009 awards. The expected exercise behavior of the broader base of employees receiving awards resulted in a lower expected option life when comparing 2011 and 2010 to 2009. The expected volatility increased in 2011 and 2010 based upon increases in the historical volatility of Regions’ stock price, offset slightly by reductions in the implied volatility measurements from traded options on the Company’s stock, when comparing 2011 and 2010 to 2009. The following table summarizes the activity for 2011, 2010 and 2009 related to stock options: Outstanding at December 31, 2008 . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Canceled/Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 31, 2009 . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Canceled/Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of Options 52,955,298 4,083,209 — (4,069,947) 52,968,560 7,173,667 (137,736) (5,004,865) Outstanding at December 31, 2010 . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Canceled/Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,999,626 1,451,200 (18,442) (10,081,035) Aggregate Intrinsic Value (In Millions) $— Weighted- Average Remaining Contractual Term 5.53 yrs. $ 8 5.04 yrs. $ 11 4.76 yrs. Weighted- Average Exercise Price $28.22 3.30 — 27.84 $26.34 7.00 3.29 20.66 $24.41 6.59 3.29 25.30 Outstanding at December 31, 2011 . . . . . . . . . . . . . . . . . . . 46,351,349 $23.62 Exercisable at December 31, 2011 . . . . . . . . . . . . . . . . . . . . 40,003,591 $26.33 $ $ 3 2 4.55 yrs. 3.91 yrs. For the years ended December 31, 2011, 2010 and 2009, the total intrinsic value of options exercised was immaterial for all years. RESTRICTED STOCK AWARDS During 2011 and 2010, Regions made restricted share grants that vest based upon a service condition. Dividend payments during the vesting period are deferred to the end of the vesting term. The fair value of these restricted shares was estimated based upon the fair value of the underlying shares on the date of the grant. The valuation was not adjusted for the deferral of dividends. During 2009, Regions granted 3 million restricted shares that vest based upon a service condition and a market condition in addition to awards that were similar to prior grants. The fair value of these restricted shares 185 was estimated on the date of the grant using a Monte-Carlo simulation method. The assumptions related to this grant included expected volatility of 84.81 percent, expected dividend yield of 1.00 percent, and an expected term of 4.0 years based on the vesting term of the market condition. The risk-free rate is consistent with the assumption used to value stock options. For all other grants that vest solely upon a service condition, the fair value of the awards is estimated based upon the fair value of the underlying shares on the date of the grant. Restricted stock award and unit activity for 2011, 2010 and 2009 is summarized as follows: Non-vested at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-vested at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-vested at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of Shares 4,123,911 3,100,415 (804,229) (455,503) 5,964,594 1,166,968 (936,412) (1,264,706) 4,930,444 2,705,834 (1,206,373) (149,545) Non-vested at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,280,360 Weighted-Average Grant Date Fair Value $27.67 2.87 16.39 16.47 $17.15 6.96 34.00 15.97 $12.13 6.66 23.36 12.93 $ 7.60 As of December 31, 2011, the pre-tax amount of non-vested stock options and restricted stock awards and units not yet recognized was $31 million, which will be recognized over a weighted-average period of 1.4 years. No share-based compensation costs were capitalized during the years ended December 31, 2011, 2010 and 2009. Regions issued approximately 867 thousand, 799 thousand, and 638 thousand of cash-settled restricted stock units during 2011, 2010, and 2009, respectively. NOTE 17. EMPLOYEE BENEFIT PLANS PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS Regions has a defined-benefit pension plan (the “pension plan”) covering only certain employees as the pension plan is closed to new entrants. Benefits under the pension plan are based on years of service and the employee’s highest five years of compensation during the last ten years of employment. Regions’ funding policy is to contribute annually at least the amount required by Internal Revenue Service minimum funding standards. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. The Company also sponsors a supplemental executive retirement program (the “SERP”), which is a non-qualified plan that provides certain senior executive officers defined benefits in relation to their compensation. Regions also sponsors defined-benefit postretirement health care plans that cover certain retired employees. For these certain employees retiring before normal retirement age, the Company currently pays a portion of the costs of certain health care benefits until the retired employee becomes eligible for Medicare. Certain retirees, participating in plans of acquired entities, are offered a Medicare supplemental benefit. The plan is contributory and contains other cost-sharing features such as deductibles and co-payments. Retiree health care benefits, as well as similar benefits for active employees, are provided through a self-insured program in which Company and retiree costs are based on the amount of benefits paid. The Company’s policy is to fund the Company’s share of the cost of health care benefits in amounts determined at the discretion of management. Postretirement life insurance is also provided to a grandfathered group of employees and retirees. Actuarially determined pension expense is charged to current operations using the projected unit credit method. All defined-benefit plans are referred to as “the plans” throughout the remainder of this footnote. 186 Effective April 16, 2009, future benefit accruals under the pension plan and the SERP were suspended for all participants. Even during the suspension, participants continued to earn service toward vesting and eligibility for early retirement benefits. Effective January 1, 2010, these benefit accruals were reinstated for pension plan and SERP participants. The following table sets forth the plans’ change in benefit obligation, plan assets and the funded status of the pension and other postretirement benefits plans, using a December 31 measurement date, and amounts recognized in the consolidated balance sheets at December 31: Pension Other Postretirement Benefits 2011 2010 2011 2010 (In millions) Change in benefit obligation Projected benefit obligation, beginning of period . . . . . . . . . . . . . . . . Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial losses (gains) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefit payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlement payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,725 36 91 216 (80) — (2) $1,586 $ 31 36 — 93 1 119 — (74) (32) — (3) — (2) $ 38 — 1 (5) (3) — — Projected benefit obligation, end of period . . . . . . . . . . . . . . . . . . . . . $1,986 $1,725 $ 30 $ 31 Change in plan assets Fair value of plan assets, beginning of period . . . . . . . . . . . . . . . . . . . Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Company contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefit payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlement payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,509 58 9 (80) — (2) $1,252 $ 4 128 — 238 (74) (32) — (3) — 2 (2) $ 4 — 3 (3) — — Fair value of plan assets, end of period . . . . . . . . . . . . . . . . . . . . . . . . $1,494 $1,509 $ 4 $ 4 Funded status and accrued benefit cost at measurement date . . . . . . . $ (492) $ (216) $ (26) $ (27) Amount recognized in the Consolidated Balance Sheets: Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (492) $ (216) $ (26) $ (27) Pre-tax amounts recognized in Accumulated Other Comprehensive (Income) Loss: Net actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prior service cost (credit) $ 767 5 $ 533 6 $ (5) (7) $ 772 $ 539 $ (12) $ (6) (7) $ (13) The settlement payments during 2010 relate to the settlement of liabilities under the SERP for certain executive officers. The accumulated benefit obligation for all defined-benefit plans was $1.9 billion and $1.6 billion as of December 31, 2011 and 2010, respectively, which exceeded all corresponding plan assets as of December 31, 2011 and 2010. 187 Net periodic benefit cost included the following components for the years ended December 31: Pension Other Postretirement Benefits 2011 2010 2009 2011 2010 2009 Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of prior service cost (credit) . . . . . . . . . . . . . . . . . Settlement charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — $ 36 91 (121) 45 1 $ 36 93 (107) 44 1 3 (In millions) $ 3 $— $— $— 90 1 (88) — 50 — 1 1 — (1) 1 — — (1) — 2 — — (1) — Net periodic benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 52 $ 70 $ 57 $— $— $ 1 The estimated amounts that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost in 2012 are as follows: Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prior service cost (credit) . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension Other Postretirement Benefits $71 1 $72 (In millions) $— (1) $ (1) The weighted-average assumptions used to determine benefit obligations at December 31 are as follows: Pension Other Postretirement Benefits 2011 2010 2011 2010 Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rate of annual compensation increase . . . . . . . . . . . . . 4.58% 5.41% 4.25% 3.75 3.76 N/A 4.90% N/A The weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31 are as follows: Pension Other Postretirement Benefits 2011 2010 2009 2011 2010 2009 Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected long-term rate of return on plan assets . . . . . . . . . . . . . Rate of annual compensation increase . . . . . . . . . . . . . . . . . . . . . 5.41% 6.02% 6.15% 4.90% 5.35% 6.20% 8.50 8.25 4.00 5.00 N/A 3.76 5.00 N/A 5.00 N/A 8.25 5.00 The expected long-term rate of return on plan assets is based on an estimated reasonable range of probable returns. Management chose a point within the range based on the probability of achievement combined with incremental returns attributable to active management. In February 2012, management adjusted the expected long-term rate of return on pension plan assets to 7.75 percent, based on updated estimates of probable returns. Net periodic pension cost for 2012 will be calculated using this assumption. The assumed health care cost trend rate for postretirement medical benefits was 6.8 percent for 2011 and is assumed to decrease gradually to 4.5 percent by 2027 and remain at that level thereafter. 188 A one-percentage point change in assumed health care cost trend rates would have the following effects: Effect on total of service cost and interest cost components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect on postretirement benefit obligations . . . . . . . . . . . . . . $ 34 830 $ (30) (743) 1-Percentage Point Increase 1-Percentage Point Decrease (In thousands) The pension plan’s investment strategy is continuing to shift from focusing on maximizing asset returns to minimizing funding ratio volatility, with an increase to the allocation to bonds. The target asset allocation is 46 percent equities, 32 percent fixed income securities and 22 percent in all other types of investments. Equity securities include investments in large and small/mid cap companies primarily located in the United States as well as investments in international equities. Fixed income securities include investments in corporate and government bonds, asset-backed securities and any other fixed income investments as allowed by respective prospectuses and other offering documents. Other types of investments may include hedge funds, real estate funds, and private equity funds that follow several different strategies. Plan assets are highly diversified with respect to asset class, security and manager. Investment risk is controlled with plan assets rebalancing to target allocations on a periodic basis and continual monitoring of investment managers’ performance relative to the investment guidelines established with each investment manager. The Regions pension plan has a portion of its investments in Regions common stock. At December 31, 2011, the number of shares held by the plan was 2,855,618, which represents less than one percent of the plan assets for a total market value of approximately $12 million. 189 The following table presents the fair value of Regions’ defined-benefit pension plans’ and other postretirement plans’ financial assets as of December 31: Cash and cash equivalents(1) . . . . . . . $ 30 $— $— $ 30 (In millions) $100 $— $— $ 100 2011 2010 Level 1 Level 2 Level 3 Fair Value Level 1 Level 2 Level 3 Fair Value Fixed income securities: U.S. Treasury and federal agency securities . . . . . . . . . . — Mortgage-backed securities . . . — Collateralized mortgage 116 — 11 — obligations . . . . . . . . . . . . . . . — 11 — Obligations of states and political subdivisions . . . . . . — Corporate bonds . . . . . . . . . . . . — 1 — 158 — 116 11 11 1 158 — — — — — 104 — 14 — 22 — 1 — 130 — 104 14 22 1 130 Total fixed income securities . . . . . . . . . . . . $— $297 $— $ 297 $— $271 $— $ 271 Equity securities: Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International 211 — 3 — — — 211 3 235 — 3 — — — 235 3 Total common stock . . . . . $214 $— $— $ 214 $238 $— $— $ 238 Mutual funds: Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International 309 — 1 — — — 309 1 235 — 133 — — — 235 133 Total mutual funds . . . . . . $310 $— $— $ 310 $368 $— $— $ 368 Collective investment trust funds: Fixed income fund . . . . . . . . . . — Common stock fund . . . . . . . . . — International fund . . . . . . . . . . . — 210 — 31 — 120 — 210 31 120 — — — 172 — 40 — 158 — 172 40 158 $— 361 — $ 361 $— 370 — $ 370 International hedge funds . . . . . . . . . $— $ 73 $— $ 73 $— $ 54 $— $ 54 Real estate funds . . . . . . . . . . . . . . . . $— $— $186 $ 186 $— $— $102 $ 102 Private equity funds . . . . . . . . . . . . . $— $— $ 26 Other assets . . . . . . . . . . . . . . . . . . . . $— $— $ 1 $ $ 26 1 $— $— $ $— $— $ 9 1 $ $ 9 1 $554 $731 $213 $1,498 $706 $695 $112 $1,513 (1) This amount includes financial assets related to other postretirement plans of approximately $4 million at both December 31, 2011 and 2010. For all investments, quoted market prices of identical assets on active exchanges, or Level 1 measurements, are used if available. Where such quoted market prices are not available, quoted market prices of similar instruments (including matrix pricing) and/or discounted cash flows to estimate a value of these securities, or Level 2 measurements are utilized. Level 2 discounted cash flow analyses are typically based on market interest rates, prepayment speeds and/or option adjusted spreads. Level 3 measurements are based on assumptions that are not readily observable in the market place. 190 For all investments, the Plan attempts to use quoted market prices of identical assets on active exchanges, or Level 1 measurements. Where such quoted market prices are not available, the Plan typically employs quoted market prices of similar instruments (including matrix pricing) and/or discounted cash flows to estimate a value of these securities, or Level 2 measurements. Level 2 discounted cash flow analyses are typically based on market interest rates, prepayment speeds and/or option adjusted spreads. Level 3 measurements include discounted cash flow analyses based on assumptions that are not readily observable in the market place. Such assumptions include projections of future cash flows, including loss assumptions, and discount rates. Investments held in the retirement plan consist of cash and cash equivalents, fixed income securities (U.S. Treasury, federal agency securities, mortgage-backed securities, collateralized mortgage obligations, obligations of states and political subdivisions and corporate bonds), equity securities (primarily common stock and mutual funds), collective trust funds, hedge funds, real estate funds, private equity and other assets and are recorded at fair value on a recurring basis. See Note 1 for a description of valuation methodologies related to U.S. Treasuries, federal agency securities, mortgage-backed securities, obligations of states and political subdivisions and equity securities. The methodology described in Note 1 for other debt securities is applicable to corporate bonds. Mutual funds are valued based on quoted market prices of identical assets on active exchanges; these valuations are Level 1 measurements. Collective trust funds, international hedge funds, real estate funds, private equity funds and other assets are valued based on net asset value or the valuation of the limited partner’s portion of the equity of the fund. Third party fund managers provide these valuations based primarily on estimated valuations of underlying investments. These funds are included in either Level 2 or Level 3, based on the nature of the underlying investments and on redemption restrictions. The following table illustrates a rollforward for pension plan financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31 (the other postretirement plan had no Level 3 financial assets): Fair Value Measurements Using Significant Unobservable Inputs Year Ended December 31, 2011 (Level 3 measurements only) Real estate funds Private equity funds Other assets (In millions) Beginning balance, January 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $102 $ 9 Actual return on plan assets: Net appreciation (depreciation) in fair value of investments . . . . . . Purchases, sales, issuances, and settlements, net . . . . . . . . . . . . . . . . . . . 19 65 Ending balance, December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $186 — 17 $ 26 $ 1 — — $ 1 The amount of total gains (losses) for the period attributable to the change in unrealized gains (losses) relating to assets still held at December 31, 2011: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19 $— $— 191 Fair Value Measurements Using Significant Unobservable Inputs Year Ended December 31, 2010 (Level 3 measurements only) Real estate funds Private equity funds Other assets (In millions) Beginning balance, January 1, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56 $ 1 Actual return on plan assets: Net appreciation (depreciation) in fair value of investments . . . . Purchases, sales, issuances, and settlements, net . . . . . . . . . . . . . . . . . (4) 50 — Ending balance, December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $102 $ 8 9 $ 1 — — $ 1 The amount of total gains (losses) for the period attributable to the change in unrealized gains (losses) relating to assets still held at December 31, 2010: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4) $— $— Information about the expected cash flows for the pension plan and other postretirement benefits plans is as follows: Other Postretirement Benefits Pension (In millions) Expected Employer Contributions: 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected Benefit Payments: 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017-2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9 $ 85 90 96 94 100 576 $ 2 $ 3 3 3 2 2 10 OTHER PLANS Regions has a defined-contribution 401(k) plan that historically included a company match of eligible employee contributions. Through March 31, 2009, this match totaled 100 percent of the eligible employee pre-tax contribution (up to 6 percent of compensation) after one year of service and was initially invested in Regions common stock. Matching contributions in the 401(k) plan were temporarily suspended beginning in the second quarter of 2009. Effective January 1, 2010, Regions restored matching contributions to the 401(k) plan to the pre-existing levels. Regions’ contribution to the 401(k) plan on behalf of employees totaled $42 million, $40 million and $18 million in 2011, 2010 and 2009, respectively. Regions’ 401(k) plan held 34 million and 28 million shares of Regions common stock at December 31, 2011 and 2010, respectively. For the years ended December 31, 2011, 2010 and 2009, the 401(k) plan received $1 million, $1 million and $5 million, respectively, in dividends on Regions common stock. 192 NOTE 18. OTHER NON-INTEREST INCOME AND EXPENSE The following is a detail of other non-interest income from continuing operations for the years ended December 31: Insurance commissions and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial credit income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net revenue (loss) from affordable housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Visa-related gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 172 Other miscellaneous income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $106 83 80 (69) (In millions) $104 88 76 (72) — 135 $372 $331 $105 74 70 (53) 80 188 $464 2011 2010 2009 The following is a detail of non-interest expense from continuing operations for the years ended December 31: Professional and legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of core deposit intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other real estate owned expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FDIC premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on early extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Branch consolidation and equipment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other miscellaneous expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 2010 2009 $ 175 95 162 217 — 75 616 $1,340 (In millions) $ 170 107 209 220 108 — 640 $1,454 $ 167 120 175 227 — — 683 $1,372 NOTE 19. INCOME TAXES The components of income tax benefit from continuing operations for the years ended December 31 were as follows: 2011 2010 2009 (In millions) Current income tax (benefit) expense Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2 1 $(183) $(418) 8 2 Total current (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3 $(181) $(410) Deferred income tax (benefit) expense Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1 (32) $(123) $ 328 (112) (72) Total deferred (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(31) $(195) $ 216 Total income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(28) $(376) $(194) Discontinued Operations: Income tax expense (benefit) from discontinued operations was $(4) million, $30 million and $23 million in 2011, 2010 and 2009, respectively. The deferred income tax expense (benefit) reflected in discontinued operations was $8 million, ($15) million and $29 million in 2011, 2010 and 2009, respectively. 193 Income tax benefit does not reflect the tax effects of unrealized gains and losses on securities available for sale, unrealized gains and losses on derivative instruments and the net change from defined benefit plans. Refer to Note 14 for additional information on stockholders’ equity and comprehensive income (loss). The income tax effects resulting from stock transactions under the Company’s compensation plans were a decrease to stockholders’ equity of $7 million, $11 million and zero in 2011, 2010 and 2009, respectively. Income taxes from continuing operations for financial reporting purposes differs from the amount computed by applying the statutory federal income tax rate of 35 percent for the years ended December 31, as shown in the following table: Tax on income (loss) from continuing operations computed at statutory federal income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56 $(295) $(444) Increase (decrease) in taxes resulting from: 2011 2010 2009 (Dollars in millions) State income tax, net of federal tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Affordable housing credits and other credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill impairment Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lease financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt income from obligations of states and political subdivisions . . . . . . . . . . . . Regulatory charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20) (107) 89 (34) 24 (21) (17) 2 $ (28) (66) (80) — (30) 458 (20) (46) (102) — (33) 74 (21) 26 — 21 (12) $(376) $(194) Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17.4)% 44.5% 15.3% Discontinued Operations: In 2011, a regulatory settlement was finalized and a portion was determined to be deductible for income tax purposes. This settlement resulted in a $27 million income tax benefit to discontinued operations. In addition, the $492 million goodwill impairment reflected in 2011 discontinued operations resulted in a $14 million income tax benefit. The 2010 regulatory charge of $125 million reflected in discontinued operations was considered to be non-deductible at the time of the accrual. Significant components of the Company’s net deferred tax asset at December 31 are listed below: Deferred tax assets: Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal tax credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net operating loss carryfowards, if applicable, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . Employee benefits and deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gains and losses included in stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax assets less valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities: Lease financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill and intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 2010 (In millions) $1,069 260 195 115 46 264 1,949 (32) 1,917 315 200 54 25 37 631 $1,286 $1,232 185 229 83 163 251 2,143 (30) 2,113 303 240 79 68 36 726 $1,387 194 The following table provides details of the Company’s tax carryforwards at December 31, 2011, including the expiration dates, any related valuation allowance and the amount of taxable earnings necessary to fully realize each net deferred tax asset balance: General business credits-federal . . . . . . . . Alternative minimum tax credits—federal . . . . . . . . . . . . . . . . . . . Net operating losses-states . . . . . . . . . . . . Net operating losses-states . . . . . . . . . . . . Net operating losses-states . . . . . . . . . . . . Other credits-states . . . . . . . . . . . . . . . . . . Expiration Dates Deferred Tax Asset Balance Valuation Allowance Net Deferred Tax Asset Balance Pre-Tax Earnings Necessary to Realize(1) 2029-2031 $239 (In millions) $— $239 $ N/A None(2) 2012-2016 2017-2023 2024-2031 2012-2016 21 17 82 96 6 — (7) (7) (14) (4) 21 10 75 82 2 N/A 227 1,781 2,060 N/A (1) N/A indicates that credits are not measured on a pre-tax basis. (2) Alternative minimum tax credits can be carried forward indefinitely. The Company’s determination of the realization of the net deferred tax asset is based on its assessment of all available positive and negative evidence. The Company is currently in a three-year cumulative loss position, which represents negative evidence. Of the $1.3 billion net deferred tax asset, $429 million relates to net operating losses and tax carryforwards of which $87 million expires before 2024 (as detailed in the table above). The remaining $857 million of net deferred tax assets do not have a set expiration date at December 31, 2011. At December 31, 2011, positive evidence supporting the realization of the deferred tax asset includes the reversal of taxable temporary differences that will offset approximately $850 million of the gross deferred tax asset. The Company has projected future taxable income over the next five tax years. Further positive evidence includes the Company’s strong capital position and history of significant pre-tax earnings which the Company believes outweighs the negative evidence of recent pre-tax losses. The Company does not believe that a portion of the state net operating loss carryforwards and state tax credit carryforwards will be realized due to the length of certain state carryforward periods. Accordingly, a valuation allowance has been established in the amount of $32 million against such benefits at December 31, 2011 compared to $30 million at December 31, 2010. Except for certain state tax carryforwards, the Company believes the net deferred tax asset is more-likely-than-not to be realized. A reconciliation of the beginning and ending amount of unrecognized tax benefits (“UTBs”) is as follows: 2011 2010 2009 Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions based on tax positions related to the current year . . . . . . . . . . . . . . . . . . . . . . Additions based on tax positions taken in a prior period . . . . . . . . . . . . . . . . . . . . . . . . . Reductions based on tax positions taken in a prior period . . . . . . . . . . . . . . . . . . . . . . . Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expiration of statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (In millions) $ 55 $ 26 5 9 32 14 (29) — $ 38 6 10 (10) (3) — (2) — (48) — Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39 $ 38 $ 26 During 2010, the Internal Revenue Service (“IRS”) completed the field examination for the tax years 2007, 2008 and 2009 and issued Revenue Agent’s Reports to the Company. Included within these reports was a proposed adjustment to the timing of deductions related to certain expenses. The Company has filed a protest 195 with the IRS Appeals Division and it is anticipated that the matter will be concluded within the next 12 months. The impact of the protest, whether successful or not, will not have a material impact on the Company’s business, financial position, results of operations or cash flows. All federal tax years subsequent to the above years are open to examination. With few exceptions, the Company is no longer subject to state and local income tax examinations for tax years before 2007. Currently, there are disputed tax positions taken in previously filed tax returns with certain states, including positions regarding investment and intellectual property subsidiaries. The Company continues to evaluate these positions and intends to defend proposed adjustments made by these tax authorities. The Company does not anticipate that the ultimate resolution of these examinations will result in a material change to its business, financial position, results of operations or cash flows. As a result of the potential resolution of multiple state income tax examinations and the federal income examination for the tax years 2007 through 2009, it is reasonably possible that the UTB balance could decrease as much as $13 million during the next twelve months, since resolved items will be removed from the balance whether their resolution results in payment or recognition in earnings. As of December 31, 2011, 2010 and 2009, the balance of the Company’s UTBs that would reduce the effective tax rate, if recognized, was $25 million, $24 million and $18 million, respectively. The remainder of the UTB balance has indirect tax benefits in other jurisdictions or is the tax effect of temporary differences. During 2011, 2010 and 2009, income tax expense (benefit) includes interest expense, interest income and penalties related to income taxes, before the impact of any applicable federal and state deductions, of ($2) million, $2 million and $5 million, respectively. As of December 31, 2011 and December 31, 2010, the Company recognized a liability of $7 million and $10 million, respectively, for interest and penalties related to income taxes, before the impact of any applicable federal and state deductions. 196 NOTE 20. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES The following tables present the notional and fair value of derivative instruments on a gross basis as of December 31: 2011 Asset Derivatives Liability Derivatives Notional Value Balance Sheet Location Fair Value Balance Sheet Location Fair Value (In millions) Derivatives in fair value hedging relationships: Interest rate swaps . . . . . . . . Forward commitments . . . . . . . . Derivatives in cash flow hedging $ 5,535 640 relationships: Other assets $ 153 Other liabilities $ Interest rate swaps . . . . . . . . 11,500 Other assets 209 Other liabilities 1 11 1 Total derivatives designated as hedging instruments . . . . . . . . $ 17,675 $ 362 $ 13 Derivatives not designated as hedging instruments: Interest rate swaps(1) Interest rate options(2) Interest rate futures and . . . . . . . . . . . forward commitments . . . Other contracts . . . . . . . . . . $ 59,293 4,018 Other assets Other assets $2,396 41 Other liabilities Other liabilities $2,414 28 90,607 1,276 Other assets Other assets 11 43 Other liabilities Other liabilities Total derivatives not designated as hedging instruments . . . . . . $155,194 Total derivatives . . . . . $172,869 $2,491 $2,853 23 36 $2,501 $2,514 (1) (2) Includes Morgan Keegan amounts of $4,198 million in Notional Value and $454 million in Other Assets/ Other Liabilities Includes Morgan Keegan amounts of $364 million in Notional Value and $23 million in Other Assets/Other Liabilities 197 2010 Asset Derivatives Liability Derivatives Notional Value Balance Sheet Location Fair Value Balance Sheet Location Fair Value (In millions) Derivatives in fair value hedging relationships: Interest rate swaps . . . . . . . . . . . . . . $ 9,230 Other assets $ 226 Other liabilities $ — Derivatives in cash flow hedging relationships: Interest rate swaps . . . . . . . . . . . . . . Interest rate options . . . . . . . . . . . . . 15,680 2,000 Other assets Other assets Total . . . . . . . . . . . . . . . . . . . . . . . . 17,680 Total derivatives designated as hedging Other liabilities Other liabilities 43 5 48 instruments . . . . . . . . . . . . . . . . . . . . . $ 26,910 $ 274 127 — 127 $ 127 Derivatives not designated as hedging instruments: Interest rate swaps(1) Interest rate options(2) Interest rate futures and forward . . . . . . . . . . . . $ 53,290 4,271 . . . . . . . . . . . commitments . . . . . . . . . . . . . . . . Other contracts . . . . . . . . . . . . . . . . 34,965 1,331 Total derivatives not designated as hedging instruments . . . . . . . . . . . . . . $ 93,857 Total derivatives . . . . . . . . . . . $120,767 Other assets Other assets $1,778 40 Other liabilities Other liabilities $1,823 29 Other assets Other assets 35 21 Other liabilities Other liabilities 10 19 $1,874 $2,148 $1,881 $2,008 (1) (2) Includes Morgan Keegan amounts of $4,104 million in Notional Value and $269 million in Other Assets/ Other Liabilities Includes Morgan Keegan amounts of $776 million in Notional Value and $21 million in Other Assets/Other Liabilities 198 HEDGING DERIVATIVES Derivatives entered into to manage interest rate risk and facilitate asset/liability management strategies are designated as hedging derivatives. Derivative financial instruments that qualify in a hedging relationship are classified, based on the exposure being hedged, as either a fair value hedge or cash flow hedges. The Company formally documents all hedging relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for entering into various hedge transactions. The Company performs periodic assessments to determine whether the hedging relationship has been highly effective in offsetting changes in fair values or cash flows of hedged items and whether the relationship is expected to continue to be highly effective in the future. When a hedge is terminated or hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, or because it is probable that the forecasted transaction will not occur by the end of the specified time period, the derivative will continue to be recorded in the consolidated balance sheet at its fair value, with changes in fair value recognized currently in other non-interest income. Any asset or liability that was recorded pursuant to recognition of the firm commitment is removed from the consolidated balance sheets and recognized currently in other non-interest expense. Gains and losses that were accumulated in other comprehensive income pursuant to the hedge of a forecasted transaction are recognized immediately in other non-interest expense. FAIR VALUE HEDGES Fair value hedge relationships mitigate exposure to the change in fair value of an asset, liability or firm commitment. Under the fair value hedging model, gains or losses attributable to the change in fair value of the derivative instrument, as well as the gains and losses attributable to the change in fair value of the hedged item, are recognized in earnings in the period in which the change in fair value occurs. The corresponding adjustment to the hedged asset or liability is included in the basis of the hedged item, while the corresponding change in the fair value of the derivative instrument is recorded as an adjustment to other assets or other liabilities, as applicable. Hedge ineffectiveness exists to the extent the changes in fair value of the derivative do not offset the changes in fair value of the hedged item and is recorded as other non-interest expense. Regions enters into interest rate swap agreements to manage interest rate exposure on the Company’s fixed- rate borrowings, which includes long-term debt and certificates of deposit. These agreements involve the receipt of fixed-rate amounts in exchange for floating-rate interest payments over the life of the agreements. Regions also enters into forward sale commitments to hedge changes in the fair value of available-for-sale securities. CASH FLOW HEDGES Cash flow hedge relationships mitigate exposure to the variability of future cash flows or other forecasted transactions. For cash flow hedge relationships, the effective portion of the gain or loss related to the derivative instrument is recognized as a component of other comprehensive income. Ineffectiveness is measured by comparing the change in fair value of the respective derivative instrument and the change in fair value of a “perfectly effective” hypothetical derivative instrument. Ineffectiveness will be recognized in earnings only if it results from an overhedge. The ineffective portion of the gain or loss related to the derivative instrument, if any, is recognized in earnings as other non-interest expense during the period of change. Amounts recorded in other comprehensive income are recognized in earnings in the periods during which the hedged item impacts earnings. Regions enters into interest rate swap agreements to manage overall cash flow changes related to interest rate risk exposure on LIBOR-based loans. The agreements effectively modify the Company’s exposure to interest rate risk by utilizing receive fixed/pay LIBOR interest rate swaps. Regions issues long-term fixed-rate debt for various funding needs. Regions enters into receive LIBOR/pay fixed forward starting swaps to hedge risks of changes in the projected quarterly interest payments attributable to changes in the benchmark interest rate (LIBOR) during the time leading up to the probable issuance date of the new long term fixed-rate debt. 199 Regions enters into interest rate option contracts to protect cash flows through the maturity date of the hedging instrument on designated one-month LIBOR floating-rate loans from adverse extreme market interest rate changes. Regions purchases Eurodollar futures to hedge the variability in future cash flows based on forecasted resets of one-month LIBOR-based floating rate loans due to changes in the benchmark interest rate. Regions recognized an unrealized after-tax loss of $45 million and an unrealized after-tax gain of $37 million in accumulated other comprehensive income at December 31, 2011 and 2010, respectively, related to terminated cash flow hedges of loan and debt instruments which will be amortized into earnings in conjunction with the recognition of interest payments through 2017. Regions recognized pre-tax income of $48 million and $41 million during the years ended December 31, 2011 and 2010, respectively, related to the amortization of cash flow hedges of loan and debt instruments. Regions expects to reclassify out of other comprehensive income and into earnings approximately $47 million in pre-tax income due to the receipt or payment of interest payments on all cash flow hedges within the next twelve months. Included in this amount is $17 million in pre-tax net losses related to the amortization of discontinued cash flow hedges. The maximum length of time over which Regions is hedging its exposure to the variability in future cash flows for forecasted transactions is approximately six years as of December 31, 2011. The following tables present the effect of derivative instruments on the statements of operations: Year Ended December 31, 2011 Derivatives in Fair Value Hedging Relationships Location of Gain(Loss) Recognized in Income on Derivatives Amount of Gain(Loss) Recognized in Income on Derivatives Hedged Items in Fair Value Hedge Relationships Location of Gain(Loss) Recognized in Income on Related Hedged Item Interest rate swaps Interest rate swaps Forward commitments Other non-interest expense Other non-interest expense Interest expense Total (In millions) $ (74) 173 (46) Securities available Debt/CDs Debt/CDs for sale $ 53 Other non- interest expense Interest expense Other non-interest expense Amount of Gain(Loss) Recognized in Accumulated OCI on Derivatives (Effective Portion)(1) Location of Gain(Loss) Reclassified from Accumulated OCI into Income (Effective Portion) Amount of Gain(Loss) Reclassified from Accumulated OCI into Income (Effective Portion)(2) Location of Gain(Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) (In millions) $ 92 Interest income on loans 2 Interest expense on debt (2)Interest income on loans 1 Interest income on loans $183 Other non-interest expense (11) Other non-interest expense Interest income on loans 4 (2) Other non-interest expense $ 93 $174 Derivatives in Cash Flow Hedging Relationships Interest rate swaps Forward starting swaps Interest rate options Eurodollar futures Total (1) After-tax (2) Pre-tax Amount of Gain(Loss) Recognized in Income on Related Hedged Item $ 89 15 46 $150 Amount of Gain(Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) (2) $ 1 (1) — — $— 200 Year Ended December 31, 2010 Derivatives in Fair Value Hedging Relationships Location of Gain(Loss) Recognized in Income on Derivatives Amount of Gain(Loss) Recognized in Income on Derivatives Interest rate swaps Interest rate swaps Other non-interest expense Interest expense Total (In millions) $ 47 245 $ 292 Hedged Items in Fair Value Hedge Relationships Location of Gain(Loss) Recognized in Income on Related Hedged Item Debt/CDs Debt/CDs Other non-interest expense Interest expense Derivatives in Cash Flow Hedging Relationships Amount of Gain(Loss) Recognized in Accumulated OCI on Derivatives (Effective Portion) (1) Location of Gain(Loss) Reclassified from Accumulated OCI into Income (Effective Portion) Amount of Gain(Loss) Reclassified from Accumulated OCI into Income (Effective Portion)(2) Location of Gain(Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) Interest rate swaps Interest rate swaps Interest rate options Eurodollar futures Total (1) After-tax (2) Pre-tax (In millions) $ (97) Interest income on loans (35) Interest expense on debt (21) Interest income on loans (13) Interest income on loans $182 Other non-interest expense — Other non-interest expense 43 34 Interest income on loans Other non-interest expense $(166) $259 Year Ended December 31, 2009 Derivatives in Fair Value Hedging Relationships Location of Gain(Loss) Recognized in Income on Derivatives Amount of Gain(Loss) Recognized in Income on Derivatives (In millions) Hedged Items in Fair Value Hedge Relationships Location of Gain(Loss) Recognized in Income on Related Hedged Item Interest rate swaps Interest rate swaps Other non-interest expense Interest expense $ (113) Debt/CDs Other non-interest expense 169 Debt/CDs Interest expense Total $ 56 Derivatives in Cash Flow Hedging Relationships Amount of Gain(Loss) Recognized in OCI on Derivatives (Effective Portion)(1) Amount of Gain(Loss) Reclassified from Accumulated OCI into Income (Effective Portion)(2) Location of Gain(Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) Location of Gain(Loss) Reclassified from Accumulated OCI into Income (Effective Portion) (In millions) Interest rate swaps Forward starting swaps Interest rate options Eurodollar futures Total (1) After-tax (2) Pre-tax $ (97) Interest income on loans 10 Interest expense on debt (29) Interest income on loans (5) Interest income on loans $238 Other non-interest expense — Other non-interest expense Interest income on loans 85 30 Other non-interest expense $ (121) $353 201 Amount of Gain(Loss) Recognized in Income on Related Hedged Item $ (62) 11 $ (51) Amount of Gain(Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)(2) $ (5) — — (7) $ (12) Amount of Gain(Loss) Recognized in Income on Related Hedged Item $105 4 $109 Amount of Gain(Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)(2) 9 $ — — 9 $ 18 DERIVATIVES NOT DESIGNATED AS HEDGES The Company maintains a derivatives trading portfolio of interest rate swaps, option contracts, and futures and forward commitments used to meet the needs of its customers. The portfolio is used to generate trading profit and to help clients manage market risk. The Company is subject to the credit risk that a counterparty will fail to perform. The Company is also subject to market risk, which is evaluated by the Company and monitored by the asset/liability management function. Separate derivative contracts are entered into to reduce overall market exposure to pre-defined limits. The contracts in this portfolio do not qualify for hedge accounting and are marked-to-market through earnings and included in other assets and other liabilities. In the normal course of business, Morgan Keegan enters into underwriting and forward and future commitments on U.S. Government and municipal securities. As of December 31, 2011 and 2010, the total notional amount related to forward and future commitments was $810 million and $312 million, respectively. The brokerage subsidiary typically settles its position by entering into equal but opposite contracts and, as such, the contract amounts do not necessarily represent future cash requirements. Settlement of the transactions relating to such commitments is not expected to have a material effect on the subsidiary’s financial position. Transactions involving future settlement give rise to market risk, which represents the potential loss that can be caused by a change in the market value of a particular financial instrument. The exposure to market risk is determined by a number of factors, including size, composition and diversification of positions held, the absolute and relative levels of interest rates, and market volatility. Regions enters into interest rate lock commitments, which are commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. At December 31, 2011 and 2010, Regions had $559 million and $717 million, respectively, in total notional amount of rate lock commitments. Regions manages market risk on interest rate lock commitments and mortgage loans held for sale with corresponding forward sale commitments, which are recorded at fair value with changes in fair value recorded in mortgage income. At December 31, 2011 and 2010, Regions had $1.3 billion and $1.7 billion, respectively, in total absolute notional amount related to these forward rate commitments. FAIR VALUE OPTION Regions has elected to account for mortgage servicing rights at fair market value with any changes to fair value being recorded within mortgage income. Concurrent with the election to use the fair value measurement method, Regions began using various derivative instruments, in the form of forward rate commitments, futures contracts, swaps and swaptions to mitigate the statement of operations effect of changes in the fair value of its mortgage servicing rights. As of December 31, 2011 and 2010, the total notional amount related to these contracts was $5.1 billion and $1.8 billion, respectively. The following tables present the location and amount of gain or (loss) recognized in income on derivatives not designated as hedging instruments in the statements of operations for the years ended December 31: Derivatives Not Designated as Hedging Instruments Capital markets and investment income 2011 2010 2009 (In millions) Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate futures and forward commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11 (3) (1) 11 $(10) $ 3 (3) 11 4 (43) 7 2 Total capital markets and investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage income Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate futures and forward commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 80 2 18 1 (30) 18 — (4) 74 (8) 50 Total mortgage income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 88 42 $118 $ 89 $ 12 202 Credit risk, defined as all positive exposures not collateralized with cash or other assets, totaled approximately $924 million and $1.0 billion at December 31, 2011 and 2010, respectively. This amount represents the net credit risk on all trading and other derivative positions held by Regions. CREDIT DERIVATIVES Regions has both bought and sold credit protection in the form of participations on interest rate swaps (swap participations). These swap participations, which meet the definition of credit derivatives, were entered into in the ordinary course of business to serve the credit needs of customers. Credit derivatives, whereby Regions has purchased credit protection, entitle Regions to receive a payment from the counterparty when the customer fails to make payment on any amounts due to Regions upon early termination of the swap transaction and have maturities between 2012 and 2026. Credit derivatives whereby Regions has sold credit protection have maturities between 2012 and 2018. For contracts where Regions sold credit protection, Regions would be required to make payment to the counterparty when the customer fails to make payment on any amounts due to the counterparty upon early termination of the swap transaction. Regions bases the current status of the prepayment/performance risk on bought and sold credit derivatives on recently issued internal risk ratings consistent with the risk management practices of unfunded commitments. Regions’ maximum potential amount of future payments under these contracts as of December 31, 2011 is approximately $30 million. This scenario would only occur if variable interest rates were at zero percent and all counterparties defaulted with zero recovery. The fair value of sold protection at December 31, 2011 was immaterial. In transactions where Regions has sold credit protection, recourse to collateral associated with the original swap transaction is available to offset some or all of Regions’ obligation. CONTINGENT FEATURES Certain of Regions’ derivative instrument contracts with broker-dealers contain provisions allowing those broker-dealers to terminate the contracts in the event that Regions’ and/or Regions Bank’s credit rating falls below specified ratings from certain major credit rating agencies. At December 31, 2011, Moody’s Investor Service (“Moody’s”) and Standard & Poor’s (“S&P”) credit ratings for Regions Financial Corporation were below investment grade. For Regions Bank, Moody’s credit ratings were below investment grade. As a result of these ratings, certain of Regions Bank’s broker-dealer counterparties could have terminated these contracts at their discretion. In lieu of terminating the contracts, Regions Bank and certain of its broker-dealer counterparties amended the contracts such that Regions Bank was required to post additional collateral in the cumulative amount of $186 million to these counterparties as of December 31, 2011. Some of these contracts with broker-dealers still contain credit-related termination provisions and/or credit- related provisions regarding the posting of collateral. At December 31, 2011, the net fair value of such contracts containing credit-related termination provisions that were in a liability position was $333 million, for which Regions had posted collateral of $441 million. At December 31, 2011, the net fair value of contracts that do not contain credit-related termination provisions that were in a liability position was $253 million for which Regions had posted collateral of $251 million. Other derivative contracts with broker-dealers do not contain any credit- related provisions. These counterparties require complete overnight collateralization. The aggregate fair value of all derivative instruments with any credit-risk-related contingent features that were in a liability position on December 31, 2011 and 2010, was $425 million and $508 million, respectively, for which Regions had posted collateral of $531 million and $652 million, respectively, in the normal course of business. NOTE 21. FAIR VALUE MEASUREMENTS Fair value guidance establishes a framework for using fair value to measure assets and liabilities and defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) as 203 opposed to the price that would be paid to acquire the asset or received to assume the liability (an entry price). A fair value measure should reflect the assumptions that market participants would use in pricing the asset or liability, including the assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. Required disclosures include stratification of balance sheet amounts measured at fair value based on inputs the Company uses to derive fair value measurements. These strata include: • • • Level 1 valuations, where the valuation is based on quoted market prices for identical assets or liabilities traded in active markets (which include exchanges and over-the-counter markets with sufficient volume), Level 2 valuations, where the valuation is based on quoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market, and Level 3 valuations, where the valuation is generated from model-based techniques that use significant assumptions not observable in the market, but observable based on Company-specific data. These unobservable assumptions reflect the Company’s own estimates for assumptions that market participants would use in pricing the asset or liability. Valuation techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability. Regions rarely transfers assets and liabilities measured at fair value between Level 1 and Level 2 measurements. There were no such transfers during the years ended December 31, 2011, 2010 or 2009. Trading account assets are periodically transferred to or from Level 3 valuation based on management’s conclusion regarding the best method of pricing for an individual security. Such transfers are accounted for as if they occur at the beginning of a reporting period. 204 New accounting literature effective for 2010 financial reporting required more granular levels of disclosure for fair value measurements. The new guidance did not require any changes to presentation of prior periods. The following tables present assets and liabilities measured at fair value on a recurring basis as of December 31: December 31, 2011 December 31, 2010 Level 1 Level 2 Level 3 Fair Value Level 1 Level 2 Level 3 Total Total Fair Value (In millions) Trading account assets . . . . . . . . . . . . . . . . . . . . . . . U.S. Treasury securities . . . . . . . . . . . . . . . . . . $212 $ Obligations of states and political (In millions) 3 $— $ 215 $157 $ 14 $— $ 171 subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . — 101 139 240 — 190 165 355 Mortgage-backed securities: Residential agency . . . . . . . . . . . . . . . . . . — Residential non-agency . . . . . . . . . . . . . . — Commercial agency . . . . . . . . . . . . . . . . . — Other securities . . . . . . . . . . . . . . . . . . . . . . . . — 365 Equity securities . . . . . . . . . . . . . . . . . . . . . . . Total trading account assets(1) . . . . . . . . . . . . . . . . . $577 $ 359 — — — 51 — 35 1 — — 498 $191 359 — — — 51 — 36 — 365 323 $480 $ $ 1,266 145 — — — 54 — 58 10 — — 407 $229 145 — 54 68 323 $ 1,116 Securities available for sale . . . . . . . . . . . . . . . . . . . U.S. Treasury securities . . . . . . . . . . . . . . . . . . $ 98 $ — $— $ Federal agency securities . . . . . . . . . . . . . . . . . — Obligations of states and political 147 — 98 147 — $ 91 $ — $— $ 16 — subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . — 16 20 36 — 13 17 Mortgage-backed securities: Residential agency . . . . . . . . . . . . . . . . . . — 22,175 — — Residential non-agency . . . . . . . . . . . . . . — 16 326 — Commercial agency . . . . . . . . . . . . . . . . . — 321 — Commercial non-agency . . . . . . . . . . . . . — 537 — Other debt securities . . . . . . . . . . . . . . . . . . . . — — — Equity securities(2) . . . . . . . . . . . . . . . . . . . . . . . . . . 115 22,175 — 21,845 — — 22 112 — 100 — 25 — — — 16 — 326 — 321 — 537 — 115 158 91 16 30 21,845 22 112 100 25 158 Total securities available for sale . . . . . . . . . . $213 $23,522 $ 36 $23,771 $249 $22,111 $ 39 $22,399 Mortgage loans held for sale . . . . . . . . . . . . . . . . . . $— $ 844 $— $ Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . $— $ — $182 $ 844 182 $— $ 1,174 $— $ 1,174 $— $ — $267 $ 267 Derivative assets Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . $— $ 2,758 $— $ 2,758 Interest rate options . . . . . . . . . . . . . . . . . . . . . — Interest rate futures and forward 28 13 $— $ 2,047 $— $ 2,047 45 39 6 41 — commitments . . . . . . . . . . . . . . . . . . . . . . . . — Other contracts . . . . . . . . . . . . . . . . . . . . . . . . — 11 — 43 — 11 — 43 — 29 21 — 6 Total derivative assets(3)(4) . . . . . . . . . . . . . . . . . . . . $— $ 2,840 $ 13 $ 2,853 $— $ 2,136 $ 12 35 21 $ 2,148 Trading account liabilities . . . . . . . . . . . . . . . . . . . . U.S. Treasury securities . . . . . . . . . . . . . . . . . . $— $ Obligations of states and political 97 $— $ 97 $— $ 95 $— $ 95 subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . — 2 — 2 — — — Mortgage-backed securities: Residential agency . . . . . . . . . . . . . . . . . . — Commercial agency . . . . . . . . . . . . . . . . . — Other securities . . . . . . . . . . . . . . . . . . . . . . . . — Equity securities . . . . . . . . . . . . . . . . . . . . . . . Total trading account liabilities(5) . . . . . . . . . . . . . . $ Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . 133 — — 16 — — 248 $ 5 2 7 1 1 $ 133 — 5 — 18 — 1 — $ 256 $— $ 6 4 46 — — 23 — — 164 $ 10 $ — 46 6 27 — 174 Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . $— $ 2,416 $— $ 2,416 Interest rate options . . . . . . . . . . . . . . . . . . . . . — Interest rate futures and forward 28 — $— $ 1,950 $— $ 1,950 29 26 3 28 — commitments . . . . . . . . . . . . . . . . . . . . . . . . — Other contracts . . . . . . . . . . . . . . . . . . . . . . . . — 34 — 36 — 34 — 36 — 9 19 — 1 Total derivative liabilities(3)(4) . . . . . . . . . . . . . . . . . $— $ 2,514 $— $ 2,514 $— $ 2,004 $ 4 10 19 $ 2,008 205 (1) All trading account assets are related to Morgan Keegan (see Note 25 for further discussion regarding the pending sale of Morgan Keegan) with the exception of $178 million and $141 million of equity securities at December 31, 2011 and 2010, respectively, of which all are classified as Level 1 in the table. (2) Excludes Federal Reserve Bank and Federal Home Loan Bank Stock totaling $481 million and $219 million, respectively, at December 31, 2011 and $471 million and $419 million, respectively, at December 31, 2010. (3) At December 31, 2011, derivatives include approximately $1.4 billion related to legally enforceable master netting agreements that allow the Company to settle positive and negative positions. Derivatives are also presented excluding cash collateral received of $55 million and cash collateral posted of $732 million with counterparties. At December 31, 2010, derivatives include approximately $1.0 billion related to legally enforceable master netting agreements that allow the Company to settle positive and negative positions. Derivatives are also presented excluding cash collateral received of $11 million and cash collateral posted of $810 million with counterparties. (4) Derivative assets and liabilities both include $454 million of interest rate swaps and $23 million of interest rate options at December 31, 2011 and $269 million of interest rate swaps and $21 million of interest rate options at December 31, 2010 related to Morgan Keegan, all of which are classified as Level 2 in the table. (5) All trading account liabilities are related to Morgan Keegan at December 31, 2011 and 2010. Assets and liabilities in all levels could result in volatile and material price fluctuations. Realized and unrealized gains and losses on Level 3 assets represent only a portion of the risk to market fluctuations in Regions’ consolidated balance sheets. Further, trading account assets, trading account liabilities, and derivatives included in Levels 1, 2 and 3 are used by the Asset and Liability Management Committee of the Company in a holistic approach to managing price fluctuation risks. 206 The following tables illustrate a rollforward for all assets and (liabilities) measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2011, 2010 and 2009. The tables do not reflect the change in fair value attributable to any related economic hedges the Company used to mitigate the interest rate risk associated with these assets and (liabilities). Year Ended December 31, 2011 Total Realized /Unrealized Gains or Losses Balance January 1, 2011 Included in Earnings Included in Other Compre- hensive Income (Loss) Purchases Sales Issuances Settlements (In millions) Transfers in to Level 3 Transfers out of Level 3 Balance December 31, 2011 Net change in unrealized gains (losses) included in earnings related to assets and liabilities held at December 31, 2011 Level 3 Instruments Only Trading account assets: (d) Obligations of states and political subdivisions . . . . . . . . Commercial agency MBS . . . . . . . . . . . . . Other securities . . . . . . . Total trading account $165 (17) 54 10 8 18 — — — 56 — — (65) — 1,352 — — 8,051 — — (1,364) (8,078) — 1 assets (e) . . . . . . . . . . . . $229 9 (a) — 9,459 — — (9,507) 1 Securities available for sale: Obligations of states and political subdivisions . . . . . . . . Residential non-agency MBS . . . . . . . . . . . . . Total securities available $ 17 — 22 1 for sale . . . . . . . . . . . . . . $ 39 1 (c) Mortgage servicing 6 (1) 5 — — — (3) — — — (3) — (3) — (3) — (6) — rights . . . . . . . . . . . . . . . $267 (147) (b) — 62 — — — — Trading account liabilities: (d) Mortgage-backed securities: Commercial agency . . . . . . . . . . Other securities . . . . . . . $ 6 4 Total trading account liabilities (e) . . . . . . . . . $ 10 — — — Derivatives, net: Interest rate options . . . . Interest rate futures and forward commitments . . . . . . . $ 3 123 — 5 8 — — — — — — — — (56) — — (1) — 54 — (56) — — 53 — — — — (113) — — — — (5) — — — — — — — — — — — — — — — $139 $ — 51 1 $191 $ 20 16 $ 36 $182 $ $ 5 2 7 $ 13 — $ 13 — — — — — — (147) (b) — — — 123 (b) — 123 (b) Total derivatives, net . . . . . $ 123 (b) — — — — (118) — (a) (b) (c) (d) Included in discontinued operations, on a net basis. Included in mortgage income. Included in other non-interest income. Income from trading account assets primarily represents gains/(losses) on disposition, which inherently includes commissions on security transactions during the period. (e) All amounts related to trading account assets and trading account liabilities are related to Morgan Keegan (see Note 3 and 25 for discussion of pending sale of Morgan Keegan). 207 Total Realized / Unrealized Gains or Losses Balance January 1, 2010 Included in Earnings Included in Other Compre- hensive Income (Loss) Purchases Level 3 Instruments Only Trading account assets(c): Obligations of states and political subdivisions . . . . . Commercial agency MBS . . . . . . . . . . . Other securities . . . . . $171 40 4 Total trading account (6) 2 27 — — — 198 737 12,344 assets(d) . . . . . . . . . . $215 23(a) — 13,279 Securities available for sale: . . . . . . . . . . . . . . Obligations of states and political subdivisions . . . . . Residential non-agency MBS . . . . . . . . . . . $ 17 36 Total securities available for sale . . . . $ 53 Mortgage servicing — — — 7 — 7 — — — rights . . . . . . . . . . . . . $247 (61)(b) — 81 Trading account liabilities(c): Mortgage-backed securities: Commercial . . . . . . . agency . . . . . . . . Other securities . . . . . — $ 1 Total trading account liabilities(d) . . . . . . . . $ 1 — — — — — — 5 36 41 Derivatives, net: Interest rate options . . . . . . . . . Interest rate futures and forward commitments . . . . Total derivatives, net . . $ $— 108(b) — — 3 3 — 108 — — 2 2 Year Ended December 31, 2010 Net change in unrealized gains (losses) included in earnings related to assets and liabilities held at December 31, 2010 Issuances Settlements (In millions) Transfers into Level 3 Transfers out of Level 3 Balance December 31, 2010 — — — — — — — — — — — — — — (198) — (735) (12,382) (13,315) 10 17 27 (7) — (14) — (21) — — — — (43) — 11 (43) 11 (105) — — — (105) — — — — — — — — — — — — — — — $165 $— 54 10 $229 $ 17 22 $ 39 $267 $ 6 4 $ 10 — — — — — — (61)(b) — — — $ 3 108(b) 5 8 $ — 108 (a) (b) (c) Included in discontinued operations, on a net basis. Included in mortgage income. Income from trading account assets primarily represents gains/(losses) on disposition, which inherently includes commissions on security transactions during the period. (d) All amounts related to trading account assets and trading account liabilities are related to Morgan Keegan (see Note 3 and 25 for discussion of pending sale of Morgan Keegan). 208 Year Ended December 31, 2009 Total Realized / Unrealized Gains or Losses Balance January 1, 2009 Included in Earnings Included in Other Comprehensive Income (Loss) Purchases/ Issuances Settlements (In millions) Transfers into / out of Level 3 Balance December 31, 2009 Net change in unrealized gains (losses) included in earnings related to assets and liabilities held at December 31, 2009 $275 $ (9)(a) $— $ 40 $ (96) $ 4 $214 $— 95 161 55 (13)(c) (15)(b) 51 (d) 3 — — — 101 — (32) — (103) — — — 53 247 3 (15)(c) 19 (b) 80 (e) Level 3 Instruments Only Trading account assets, net (f)(g) . . . . . . . . . . . . . . . Securities available for sale . . . . . . . . . . . . . . . . Mortgage servicing rights . . . . . . . . . . . . . . . Derivatives, net . . . . . . . . . Included in discontinued operations, on a net basis. Included in mortgage income. Included in other non-interest income. (a) (b) (c) (d) Approximately ($34) million included in discontinued operations, on a net basis and approximately $85 million included in mortgage income. (e) Approximately ($5) million included in discontinued operations, on a net basis and approximately $85 million included in mortgage (f) income. Income from trading account assets primarily represents gains/(losses) on disposition, which inherently includes commissions on security transactions during the period. (g) All amounts related to trading account assets and trading account liabilities are related to Morgan Keegan (see Note 3 and 25 for discussion of pending sale of Morgan Keegan). The following table presents the carrying value and the level of valuation assumptions of those assets measured at fair value on a non-recurring basis as of December 31: Loans held for sale . . . . . . . . . . . . . . . . . . . . . . Foreclosed property, other real estate and 2011 2010 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total $— $36 $195 (In millions) $231 $— $238 $ 31 $269 equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . — 91 162 253 — 201 152 353 The following table presents the fair value adjustments related to non-recurring fair value measurements: Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreclosed property, other real estate and equipment $(611) (229) $(259) (218) 2011 2010 (In millions) FAIR VALUE OPTION Regions elected the fair value option for FNMA and FHLMC eligible thirty-year residential mortgage loans held for sale originated on or after January 1, 2008. Additionally, Regions elected the fair value option for FNMA and FHLMC eligible fifteen-year residential mortgage loans originated on or after November 22, 2010. These elections allow for a more effective offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting. Regions has not elected the fair value option for other loans held for sale primarily because they are not economically hedged using derivative instruments. Fair values of mortgage loans held for sale are based on traded market prices of similar assets where available and/or discounted cash flows at market interest rates, adjusted for securitization activities that include servicing values and market conditions, and were recorded in loans held for sale in the consolidated balance sheets. 209 The following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for mortgage loans held for sale measured at fair value: December 31, 2011 December 31, 2010 Aggregate Fair Value Aggregate Unpaid Principal Aggregate Fair Value Less Aggregate Unpaid Principal Aggregate Fair Value Aggregate Unpaid Principal Aggregate Fair Value Less Aggregate Unpaid Principal (In millions) Mortgage loans held for sale, at fair value $844 $815 $29 $1,174 $1,181 $(7) Interest income on mortgage loans held for sale is recognized based on contractual rates and is reflected in interest income on loans held for sale in the consolidated statements of operations. The following table details net gains (losses) resulting from changes in fair value of these loans which were recorded in mortgage income in the consolidated statements of operations. These changes in fair value are mostly offset by economic hedging activities. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk. Net gains (losses) resulting from changes in fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage loans held for sale, at fair value Year Ended December 31 2011 $36 (In millions) 2010 $(14) The carrying amounts and estimated fair values of the Company’s financial instruments as of December 31 are as follows: Financial assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading account assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans (excluding leases), net of unearned . . . . . . . . . . . . . . . . . . . . . . income and allowance for loan losses (2),(3) . . . . . . . . . . . . . . . . Other interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivatives, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities: Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan commitments and letters of credit . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2011 December 31, 2010 Carrying Amount Estimated Fair Value(1) Carrying Amount Estimated Fair Value(1) (In millions) $ 7,245 1,266 24,471 16 1,193 $ 7,245 1,266 24,471 17 1,193 $ 6,919 1,116 23,289 24 1,485 $ 6,919 1,116 23,289 26 1,485 73,284 1,085 339 95,627 3,067 8,110 117 65,224 1,085 339 95,757 3,067 7,439 756 77,864 1,219 140 94,614 3,937 13,190 125 69,775 1,219 140 94,883 3,937 13,115 899 (1) Estimated fair values are consistent with an exit price concept. The assumptions used to estimate the fair values are intended to approximate those that a market participant would use in a hypothetical orderly transaction. In estimating fair value, the Company makes adjustments for interest rates, market liquidity and credit spreads as appropriate. (2) The estimated fair value of portfolio loans assumes sale of the loans to a third-party financial investor. Accordingly, the value to the Company if the loans were held to maturity is not reflected in the fair value estimate. In the current whole loan market, financial investors are generally requiring a higher rate of return than the return inherent in loans if held to maturity. The fair value discount at December 31, 2011 was $8.1 billion or 11.0%. (3) Excluded from this table is the lease carrying amount of $1.6 billion at December 31, 2011 and $1.8 billion at December 31, 2010. 210 NOTE 22. BUSINESS SEGMENT INFORMATION Regions’ segment information is presented based on Regions’ key segments of business. Each segment is a strategic business unit that serves specific needs of Regions’ customers. The Company’s primary segment is Banking/Treasury, which represents the Company’s branch network, including consumer and commercial banking functions, and has separate management that is responsible for the operation of that business unit. This segment also includes the Company’s Treasury function, including the Company’s securities portfolio and other wholesale funding activities. The Insurance segment includes all business associated with commercial insurance and credit life products sold to consumer customers. During 2011, minor reclassifications were made from the Banking/Treasury segment to the Insurance segment to more appropriately present management’s current view of the segments. The 2010 and 2009 amounts presented below have been adjusted to conform to the 2011 presentation. The Investment Banking/Brokerage/Trust segment includes trust activities and all brokerage and investment activities associated with Morgan Keegan. As discussed in Note 3 and in Note 25, in early 2012 Regions entered into an agreement to sell Morgan Keegan and related entities. The financial information related to these entities is shown in the tables below as discontinued operations, within the Investment Banking/Brokerage/Trust segment. The continuing operations information within this segment is related to Regions’ trust activities and Morgan Asset Management, which are not being sold. 211 The following tables present financial information for each reportable segment for the years ended December 31: Year Ended December 31, 2011 Investment Banking/ Brokerage/Trust Banking/ Treasury Insurance Continuing Operations Discontinued Operations Total Company Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . $ 3,375 1,530 1,800 3,342 — (52) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 355 Average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $122,497 $ 2 — 136 99 — 14 $ 25 $527 (In millions) 33 $ — 207 168 253 10 $ 31 — 995 942 492 (4) $ 3,441 1,530 3,138 4,551 745 (32) $ (191) $ (404) $ (215) $3,695 $3,254 $129,973 Year Ended December 31, 2010 Investment Banking/ Brokerage/Trust Banking/ Treasury Insurance Continuing Operations Discontinued Operations Total Company Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory charge . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . $ 3,364 2,863 2,152 3,532 — (427) $ 2 — 137 95 — 15 (In millions) 23 $ — 200 157 75 36 $ 43 — 1,042 1,001 125 30 $ 3,432 2,863 3,531 4,785 200 (346) Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (452) $ 29 $ (45) $ (71) $ (539) Average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $129,618 $513 $2,589 $3,235 $135,955 Year Ended December 31, 2009 Investment Banking/ Brokerage/Trust Banking/ Treasury Insurance Continuing Operations Discontinued Operations Total Company Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . $ 3,273 3,541 2,410 3,533 (241) $ 3 — 139 96 18 Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,150) $ 28 Average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $137,664 $494 (In millions) 17 $ — 216 156 29 $ 48 $1,310 $ 42 — 990 966 23 $ 3,335 3,541 3,755 4,751 (171) $ 43 $ (1,031) $3,291 $142,759 212 NOTE 23. COMMITMENTS, CONTINGENCIES AND GUARANTEES COMMERCIAL COMMITMENTS Regions issues off-balance sheet financial instruments in connection with lending activities. The credit risk associated with these instruments is essentially the same as that involved in extending loans to customers and is subject to Regions’ normal credit approval policies and procedures. Regions measures inherent risk associated with these instruments by recording a reserve for unfunded commitments based on an assessment of the likelihood that the guarantee will be funded and the creditworthiness of the customer or counterparty. Collateral is obtained based on management’s assessment of the creditworthiness of the customer. Credit risk associated with these instruments as of December 31 is represented by the contractual amounts indicated in the following table: . . . . . . . . . . . . . . . . . . . . . . . . . Unused commitments to extend credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial letters of credit . . . . . . . . . . . . . . . Liabilities associated with standby letters of credit Assets associated with standby letters of credit . . . . . . . . . . . . . . . . . . Reserve for unfunded credit commitments . . . . . . . . . . . . . . . . . . . . . . 2011 2010 (In millions) $37,872 2,084 33 37 36 78 $30,828 3,014 49 54 51 71 Unused commitments to extend credit—To accommodate the financial needs of its customers, Regions makes commitments under various terms to lend funds to consumers, businesses and other entities. These commitments include (among others) credit card and other revolving credit agreements, term loan commitments and short-term borrowing agreements. Many of these loan commitments have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of these commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future liquidity requirements. Standby letters of credit—Standby letters of credit are also issued to customers, which commit Regions to make payments on behalf of customers if certain specified future events occur. Regions has recourse against the customer for any amount required to be paid to a third party under a standby letter of credit. Historically, a large percentage of standby letters of credit expired without being funded. The contractual amount of standby letters of credit represents the maximum potential amount of future payments Regions could be required to make and represents Regions’ maximum credit risk. Commercial letters of credit—Commercial letters of credit are issued to facilitate foreign or domestic trade transactions for customers. As a general rule, drafts will be drawn when the goods underlying the transaction are in transit. LEASES Regions and its subsidiaries lease land, premises and equipment under cancelable and non-cancelable leases, some of which contain renewal options under various terms. The leased properties are used primarily for banking purposes. Total rental expense on operating leases for the years ended December 31, 2011, 2010 and 2009 was $197 million, $203 million and $213 million, respectively. 213 The approximate future minimum rental commitments as of December 31, 2011, for all non-cancelable leases with initial or remaining terms of one year or more are shown in the following table. Included in these amounts are all renewal options reasonably assured of being exercised. 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premises Equipment Total $ 127 121 112 104 92 477 $1,033 (In millions) $ 37 21 2 1 — — $ 61 $ 164 142 114 105 92 477 $1,094 LEGAL CONTINGENCIES Regions and its affiliates are subject to loss contingencies related to litigation and claims arising in the ordinary course of business. Regions evaluates these contingencies based on information currently available, including advice of counsel and assessment of available insurance coverage. Regions establishes accruals for litigation and claims when a loss contingency is considered probable and the related amount is reasonably estimable. Any accruals are periodically reviewed and may be adjusted as circumstances change. For certain matters, when able to do so, Regions also estimates loss contingencies for possible litigation and claims, whether or not there is an accrued probable loss. Where Regions is able to estimate such possible losses, Regions estimates that it is reasonably possible it could incur losses, in excess of amounts accrued, in an aggregate amount up to approximately $340 million as of December 31, 2011, with it also being reasonably possible that Regions could incur no losses. The estimates included in this amount are based on analysis of currently available information and are subject to significant judgment and to change as new information becomes available. Due to the inherent unpredictability of outcomes of litigation and claims, any amounts accrued or included in this aggregate amount may not represent the ultimate loss to Regions and, therefore, ultimate losses may be significantly different than the amounts accrued or included in this aggregate amount. Assessments of litigation and claims exposures are difficult due to many factors that involve inherent unpredictability. Those factors include the following: the varying stages of the proceedings, particularly in the early stages; unspecified damages; damages other than compensatory such as punitive damages; multiple defendants and jurisdictions; whether discovery has begun or not; and whether the claim involves a class-action. There are numerous factors that result in a greater degree of complexity in class-action lawsuits as compared to other types of litigation. Due to the many intricacies involved in class-action lawsuits at the early stages of these matters, obtaining clarity on a reasonable estimate is difficult which may call into question its reliability. As a result of some of these factors, Regions may be unable to estimate reasonably possible losses with respect to some of the matters disclosed below. The aggregated estimated amount provided above therefore may not include an estimate for every matter disclosed below. While the final outcome of litigation and claims exposures is inherently unpredictable, management is currently of the opinion that the outcome of pending and threatened litigation would not have a material effect on Regions’ business, consolidated financial position, results of operations or cash flows as a whole. However, in the event of unexpected future developments, it is reasonably possible that an adverse outcome in any of the matters discussed below could be material to Regions’ business, consolidated financial position, results of operations or cash flows for any particular reporting period of occurrence. Beginning in December 2007, Regions and certain of its affiliates have been named in class-action lawsuits filed in federal and state courts on behalf of investors who purchased shares of certain Regions Morgan Keegan Select Funds (the “Funds”) and shareholders of Regions. The Funds were formerly managed by Morgan Asset 214 Management, Inc. (“Morgan Asset Management”). Morgan Asset Management no longer manages these Funds, which were transferred to Hyperion Brookfield Asset Management in 2008. Certain of the Funds have since been terminated by Hyperion. The complaints contain various allegations, including claims that the Funds and the defendants misrepresented or failed to disclose material facts relating to the activities of the Funds. Plaintiffs have requested equitable relief and unspecified monetary damages. No classes have been certified. Certain of the shareholders in these Funds and other interested parties have entered into arbitration proceedings and individual civil claims, in lieu of participating in the class actions. These lawsuits and proceedings will be subject to the indemnification agreement with Raymond James Financial, Inc. discussed in Note 25 “Subsequent Event”. In July 2009, the Securities and Exchange Commission (“SEC”) filed a complaint in U.S. District Court for the Northern District of Georgia against Morgan Keegan alleging violations of the federal securities laws in connection with auction rate securities (“ARS”) that Morgan Keegan underwrote, marketed and sold. The SEC sought an injunction against Morgan Keegan for violations of the antifraud provisions of the federal securities laws, as well as disgorgement, financial penalties and other equitable relief for customers, including repurchase by Morgan Keegan of all ARS that it sold prior to March 20, 2008. Beginning in February 2009, Morgan Keegan commenced a voluntary program to repurchase ARS that it underwrote and sold to the firm’s customers, and extended that repurchase program on October 1, 2009 to include ARS that were sold by Morgan Keegan to its customers but were underwritten by other firms. On June 29, 2011, Morgan Keegan announced the final phase of the repurchase program to include ARS issued by Jefferson County, Alabama that were sold by Morgan Keegan to its customers. As of December 31, 2011, customers of Morgan Keegan owned approximately $25 thousand of Jefferson County ARS and approximately $650 thousand of other ARS, while Morgan Keegan held approximately $135 million of ARS on its balance sheet. On June 28, 2011, the Court issued a summary judgment in favor of Morgan Keegan in this case. The SEC has appealed that judgment. Previously on July 21, 2009, the Alabama Securities Commission issued a “Show Cause” order to Morgan Keegan arising out of the ARS matter that is the subject of the SEC complaint described above. The order requires Morgan Keegan to show cause why its registration as a broker-dealer should not be suspended or revoked in the State of Alabama and also why it should not be subject to disgorgement, repurchasing all ARS sold to Alabama residents and payment of costs and penalties. These matters will be subject to the indemnification agreement with Raymond James Financial, Inc. discussed in Note 25 “Subsequent Event”. In April 2009, Regions, Regions Financing Trust III (the “Trust”) and certain of Regions’ current and former directors, were named in a purported class-action lawsuit filed in the U.S. District Court for the Southern District of New York on behalf of the purchasers of trust preferred securities offered by the Trust. The complaint alleges that defendants made statements in Regions’ registration statement, prospectus and year-end filings which were materially false and misleading, and seeks equitable relief and unspecified monetary damages. On May 10, 2010, the trial court dismissed all claims against all defendants in this case. On August 23, 2011, the Second Circuit Court of Appeals affirmed the dismissal. On September 6, 2011, the plaintiffs moved for a rehearing, but that motion was denied on October 17, 2011. Any appeal to the U.S. Supreme Court is due to be filed by March 15, 2012. In October 2010, a purported class-action lawsuit was filed by Regions’ stockholders in the U.S. District Court for the Northern District of Alabama against Regions and certain former officers of Regions. The lawsuit alleges violations of the federal securities laws, including allegations that statements that were materially false and misleading were included in filings made with the SEC. The plaintiffs have requested equitable relief and unspecified monetary damages. On June 7, 2011, the trial court denied Regions’ motion to dismiss this lawsuit. This case is still early in its development and no class has been certified. Regions has received inquiries and subpoenas from government authorities primarily concerning accounting matters from 2009 and earlier periods that also have been the subject of the civil litigation mentioned above. Regions is cooperating in providing responses to these inquiries and subpoenas. In addition, the Board of Directors is conducting investigations regarding certain of the matters raised in these inquiries and subpoenas. 215 In December 2009, Regions and certain current and former directors and officers were named in a consolidated shareholder derivative action filed in Jefferson County, Alabama. The complaint alleges mismanagement, waste of corporate assets, breach of fiduciary duty and unjust enrichment relating to bonuses and other benefits received by executive management. Plaintiffs have requested equitable relief and unspecified monetary damages. A motion to dismiss all claims is pending. In September 2009, Regions was named as a defendant in a purported class-action lawsuit filed by customers of Regions Bank in the U.S. District Court for the Northern District of Georgia challenging the manner in which non-sufficient funds and overdraft fees were charged and the policies related to posting order. The case was transferred to multidistrict litigation in the U.S. District Court for the Southern District of Florida, and in May 2010 an order to compel arbitration was denied. Regions appealed the denial and on April 29, 2011, the Eleventh Circuit Court of Appeals vacated the denial and remanded the case to the district court for reconsideration of Regions’ motion to compel arbitration. On September 1, 2011, the trial court again denied Regions’ motion to compel arbitration. Regions is again appealing the denial to the Eleventh Circuit, and the case is stayed pending a resolution of the appeal. Another purported class action alleging these claims was filed in the U.S. District Court for the Northern District of Georgia in January 2012. The case is still early in its development and no class has been certified. Plaintiffs in these cases have requested equitable relief and unspecified monetary damages. GUARANTEES As a member of the Visa USA network, Regions, along with other members, indemnified Visa USA against litigation. On October 3, 2007, Visa USA was restructured and acquired several Visa affiliates. In conjunction with this restructuring, Regions’ indemnification of Visa USA was modified to cover specific litigation (“covered litigation”). Regions’ liability recognized under this indemnification was approximately $22 million and $24 million at December 31, 2011 and 2010, respectively. On March 25, 2008, Visa executed an initial public offering (“IPO”) of common stock and, in connection with the IPO, Regions’ ownership interest in Visa was converted into Class B common stock of approximately 3.8 million shares. In the first quarter of 2008, Visa redeemed approximately 1.5 million shares of the Class B common stock from Regions for proceeds of approximately $63 million, all of which was recorded as other income in the consolidated statements of operations. In the second quarter of 2009, Regions sold the remaining Class B common stock to a third party. The sale resulted in a pre-tax gain of $80 million. A portion of Visa’s proceeds from the IPO was escrowed to fund the covered litigation. To the extent that the amount available under the escrow arrangement is insufficient to fully resolve the covered litigation, Visa will enforce the indemnification obligations of Visa USA’s members for any excess amount. 216 NOTE 24. PARENT COMPANY ONLY FINANCIAL STATEMENTS Presented below are condensed financial statements of Regions Financial Corporation: Balance Sheets ASSETS Interest-bearing deposits in other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premises and equipment Investments in subsidiaries: Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31 2011 2010 (In millions) $ 2,497 1 31 20 25 $ 3,848 36 36 26 65 16,436 1,188 17,624 405 15,719 1,670 17,389 380 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,603 $21,780 LIABILITIES AND STOCKHOLDERS’ EQUITY Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,887 217 $ 4,907 139 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,104 5,046 Stockholders’ equity: Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings (deficit) Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,419 13 19,060 (4,527) (1,397) (69) 3,380 13 19,050 (4,047) (1,402) (260) Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,499 16,734 Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,603 $21,780 217 Statements of Operations Income: Year Ended December 31 2011 2010 2009 (In millions) Service fees from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on extinguishment of debt Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 129 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Expenses: Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and equipment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal and other professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 128 24 $ — 7 159 117 183 9 8 21 50 388 123 16 61 8 208 133 162 4 7 14 36 356 (5) 134 133 173 9 5 20 64 404 Income (loss) before income taxes and equity in undistributed earnings (loss) of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit (270) (121) (229) (93) (148) (31) Income (loss) before equity in undistributed earnings (loss) of subsidiaries and preferred dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (149) (136) (117) Equity in undistributed earnings (loss) of subsidiaries: Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred stock dividends and accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 317 (383) (66) (215) (214) (252) (151) (403) (539) (224) (978) 64 (914) (1,031) (230) Net income (loss) available to common shareholders . . . . . . . . . . . . . . . . . . . . . . . $(429) $(763) $(1,261) 218 Years Ended December 31 2011 2010 2009 (In millions) $ (215) $ (539) $(1,031) 66 7 16 6 (26) 79 (9) (76) (110) 35 21 34 (28) (48) 403 1 — (4) 40 (115) 21 (193) (95) 55 (1) 13 (1) (29) 914 (2) — (3) 69 (80) 136 3 (2,681) — 4 23 (1) (2,655) 690 (493) 278 1,769 (105) (194) 1,945 (707) 4,768 $ 4,061 Statements of Cash Flows Operating activities: Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net cash provided by operating activities: Equity in undistributed earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . . Depreciation, amortization and accretion, net . . . . . . . . . . . . . . . . . . . . . . . Loss on sale of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . Decrease (increase) in trading assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Increase) decrease in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investing activities: Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Principal payments on loans to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net sales of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sales and maturities of securities available for sale . . . . . . . . . . Purchases of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash from investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing activities: Proceeds from long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments on long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net proceeds from issuance of mandatorily convertible preferred stock . . . . . . Net proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends on preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash from financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (1,001) — — (51) (175) (1,227) (1,351) 3,848 $ 2,497 743 (501) — — (49) (184) 9 (213) 4,061 $3,848 NOTE 25. SUBSEQUENT EVENT On January 11, 2012, Regions entered into an agreement to sell 100% of the outstanding and issued common stock of Morgan Keegan & Company, Inc. and related affiliates to Raymond James Financial Inc. (“Raymond James”), for approximately $930 million in cash. The sale has been approved by the board of directors of the Company and the board of directors of Raymond James. As part of the transaction, Morgan Keegan will also pay Regions a dividend of $250 million before closing, pending regulatory approval, resulting in total proceeds of $1.18 billion to Regions, subject to adjustment. The transaction is anticipated to close around the end of the first quarter of 2012 subject to regulatory approvals and customary closing conditions. Morgan Asset Management and Regions Morgan Keegan Trust are not included in the sale and will remain part of Regions’ Wealth Management organization. The transaction purchase price is subject to adjustment based on the closing tangible book value of the entities being sold and retention of Morgan Keegan associates in the 90-day post-closing period. Regions believes any adjustments to the sales price will not have a material impact to the consolidated financial statements. As part of the agreement, Regions will indemnify Raymond James for all litigation matters related to pre-closing activities. At the time of the closing, Regions will record a liability equal to the fair value of the indemnification liabilities which will be included in the calculation of gain/(loss) on disposition. 219 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable. Item 9A. Controls and Procedures Based on an evaluation, as of the end of the period covered by this Form 10-K, under the supervision and with the participation of Regions’ management, including its Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and the 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 fourth fiscal quarter of the year ended December 31, 2011, there have been no changes in Regions’ internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Regions’ control over financial reporting. The Report of Management on Internal Control Over Financial Reporting is included in Item 8. of this Annual Report on Form 10-K. Item 9B. Other Information Not Applicable. 220 PART III Item 10. Directors, Executive Officers and Corporate Governance Information about the Directors and Director nominees of Regions included in Regions’ Proxy Statement for the Annual Meeting of Stockholders to be held on May 17, 2012 (the “Proxy Statement”) under the caption “ELECTION OF DIRECTORS” and the information incorporated by reference pursuant to Item 13. below are incorporated herein by reference. Information on Regions’ executive officers is included below. Information regarding Regions’ Audit Committee included under the captions “ELECTION OF DIRECTORS—The Board of Directors—Audit Committee” and “—Audit Committee Financial Experts” of the Proxy Statement is incorporated herein by reference. Information regarding late filings under Section 16(a) of the Securities Exchange Act of 1934 included in the Proxy Statement under the caption “VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF— Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by reference. Information regarding Regions’ Code of Ethics for Senior Financial Officers included in the Proxy Statement under the caption “ELECTION OF DIRECTORS—Code of Ethics for Senior Financial Officers” is incorporated herein by reference. Executive officers of the registrant as of December 31, 2011, are as follows: Executive Officer Age O. B. Grayson Hall, Jr. . . . . . . . . . . . . . . . . . . . . 54 Executive Officer Since* 1993 Position and Offices Held with Registrant and Subsidiaries President and Chief Executive Officer and Director, registrant and Regions Bank. Previously President and Chief Operating Officer, registrant and Regions Bank; Vice Chairman and Head of General Banking Group, registrant and Regions Bank; Senior Executive Vice President and Head of General Banking Group, registrant and Regions Bank. Director, Morgan Keegan & Company, Inc. David B. Edmonds . . . . . . . . . . . . . . . . . . . . . . . 58 Chief Administrative Officer and Senior Executive Vice President, registrant and Regions Bank. Previously Head of Human Resources Group, registrant and Regions Bank. 1994 Fournier J. “Boots” Gale, III . . . . . . . . . . . . . . . . 67 General Counsel and Corporate Secretary and 2011 C. Matthew Lusco . . . . . . . . . . . . . . . . . . . . . . . . Senior Executive Vice President, registrant and Regions Bank. Previously a founding partner of Maynard Cooper & Gale PC, a law firm in Birmingham, Alabama. 54 Chief Risk Officer and Senior Executive Vice President, registrant and Regions Bank. Previously managing partner of KMPG LLP’s offices in Birmingham, Alabama and Memphis, Tennessee. 2011 221 Executive Officer Age Position and Offices Held with Registrant and Subsidiaries John B. Owen . . . . . . . . . . . . . . . . . . . . . . . . . . . David J. Turner, Jr. . . . . . . . . . . . . . . . . . . . . . . . John C. Asbury . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Senior Executive Vice President and Head of Consumer Services Group, registrant and Regions Bank. Previously Senior Executive Vice President and Head of Operations and Technology Group, registrant and Regions Bank, and Chief Executive Officer for Assurant Specialty Property. Director and Chairman, Regions Insurance Group, Inc. 48 Chief Financial Officer and Senior Executive Vice President, registrant and Regions Bank. Previously Executive Vice President and Director of Internal Audit Division for registrant. Senior Executive Vice President, Business Services Group, registrant and Regions Bank. Previously served in senior management roles at Bank of America including most recently as the Pacific Northwest region executive and senior vice president of Business Banking. Director, Regions Equipment Finance Corporation 46 Executive Officer Since* 2009 2010 2010 John C. Carson, Jr. . . . . . . . . . . . . . . . . . . . . . . . 55 Chief Executive Officer and Director, 2010 Brett D. Couch . . . . . . . . . . . . . . . . . . . . . . . . . . Barbara Godin . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Morgan Keegan & Company, Inc. Previously president of Fixed Income Capital Markets at Morgan Keegan. Florida Region President and Senior Executive Vice President, Regions Bank. Previously served in senior management roles including as Mississippi state president and as area executive for West Florida. Director, Regions Investment Services, Inc. 58 Executive Vice President, Chief Credit Officer and Head of Credit Operations, Regions Bank. Previously served in senior management roles in credit and risk management. Director, Regions Insurance Group, Inc. 2010 2010 C. Keith Herron . . . . . . . . . . . . . . . . . . . . . . . . . 47 Midsouth Region President and Senior 2010 Executive Vice President, Regions Bank. Previously served in senior management roles, including as the area executive for North Alabama, for East Tennessee and for Middle Tennessee. Director, Regions Investment Services, Inc. 222 Executive Officer Age Position and Offices Held with Registrant and Subsidiaries Ellen S. Jones . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Business Operations and Support Chief Executive Officer Since* 2010 David R. Keenan . . . . . . . . . . . . . . . . . . . . . . . . . Scott M. Peters . . . . . . . . . . . . . . . . . . . . . . . . . . William D. Ritter . . . . . . . . . . . . . . . . . . . . . . . . Cynthia M. Rogers . . . . . . . . . . . . . . . . . . . . . . . Ronald G. Smith . . . . . . . . . . . . . . . . . . . . . . . . . John M. Turner, Jr . . . . . . . . . . . . . . . . . . . . . . . Financial Officer and Executive Vice President, Regions Bank. Previously held senior level finance leadership positions at Bank of America. Director, Regions Insurance Group, Inc. 43 Director of Human Resources and Executive Vice President, registrant and Regions Bank. Previously served in senior management roles in the Human Resources Group. 50 Chief Marketing Officer and Senior 55 Executive Vice President, Regions Bank. 41 Head of Wealth Management Group and Senior Executive Vice President, Regions Bank. Previously served in senior management roles including as the Central Region President and as North Central Alabama area executive. Director, Regions Insurance Group, Inc. Senior Executive Vice President, Operations and Technology, registrant and Regions Bank. Previously served in senior management roles, including as the head of Bank Operations. Southwest Region President and Senior Executive Vice President, Regions Bank. Previously served in senior management roles, including as the area executive for Mississippi/North Louisiana. Director, Regions Insurance Group, Inc. 50 Central Region President and Senior 51 2010 2010 2010 2010 2010 2011 Executive Vice President, Regions Bank. Previously served as President of Whitney National Bank and Whitney Holding Corporation. * The years indicated are those in which the individual was first deemed to be an executive officer of registrant, including its predecessor companies. Item 11. Executive Compensation All information presented under the captions “COMPENSATION DISCUSSION AND ANALYSIS,” “2011 COMPENSATION,” “COMPENSATION COMMITTEE REPORT,” “ELECTION OF DIRECTORS— Compensation Committee Interlocks and Insider Participation” and “—Relationship of Compensation Policies and Practices to Risk Management” of the Proxy Statement are incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters All information presented under the caption “VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF” of the Proxy Statement is incorporated herein by reference. 223 Equity Compensation Plan Information The following table gives information about the common stock that may be issued upon the exercise of options, warrants and rights under all of Regions’ existing equity compensation plans as of December 31, 2011. Plan Category Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) Weighted Average Exercise Price of Outstanding Options, Warrants and Rights Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in First Column) Equity Compensation Plans Approved by Stockholders . . . . . . . . . . . . . . . . 17,620,942 Equity Compensation Plans Not Approved by Stockholders . . . . . . . . 28,730,407(c) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,351,349 $18.39 $26.82 $23.62 84,288,772(b) — 84,288,772 (a) Does not include outstanding restricted stock awards. (b) Consists of shares available for future issuance under the Regions Financial Corporation 2010 Long Term Incentive Plan. During 2011, all prior long-term incentive plans were closed to new grants. (c) Consists of outstanding stock options issued under certain plans assumed by Regions in connection with business combinations, including 28,727,707 options issued under plans assumed in connection with the Regions-AmSouth merger, which were issued under plans previously approved by AmSouth stockholders but not pre-merger Regions stockholders. In each instance, the number of shares subject to option and the exercise price of outstanding options have been adjusted to reflect the applicable exchange ratio. See Note 16 “Share-Based Payments” to the consolidated financial statements included in Regions’ Annual Report on Form 10-K for the year ended December 31, 2011. Does not include 178,826 shares issuable pursuant to outstanding rights under AmSouth deferred compensation plans assumed by Regions. Item 13. Certain Relationships and Related Transactions, and Director Independence All information presented under the captions “ELECTION OF DIRECTORS—Other Transactions,” “—Review, Approval or Ratification of Transactions with Related Persons” and “—Director Independence” of the Proxy Statement are incorporated herein by reference. Item 14. Principal Accounting Fees and Services All information presented under the caption “RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM” of the Proxy Statement is incorporated herein by reference. 224 Item 15. Exhibits, Financial Statement Schedules PART IV (a) 1. Consolidated Financial Statements. The following reports of independent registered public accounting firm and consolidated financial statements of Regions and its subsidiaries are included in Item 8. of this Form 10-K: . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reports of Independent Registered Public Accounting Firm; Consolidated Balance Sheets—December 31, 2011 and 2010; . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Operations—Years ended December 31, 2011, 2010 and 2009; . . . . Consolidated Statements of Changes in Stockholders’ Equity—Years ended December 31, 2011, 2010 and 2009; and . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows—Years ended December 31, 2011, 2010 and 2009. . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 125 126 127 129 130 2. Consolidated Financial Statement Schedules. The following consolidated financial statement schedules are included in Item 8. of this Form 10-K: None. The Schedules to consolidated financial statements are not required under the related instructions or are inapplicable. (b) Exhibits. The exhibits indicated below are either included or incorporated by reference as indicated. SEC Assigned Exhibit Number Description of Exhibits 2.1 3.1 3.2 3.4 4.1 4.2 4.3 Stock Purchase Agreement between Regions Financial Corporation and Raymond James Financial, Inc. dated January 11, 2012, incorporated by reference to Exhibit 2.1 to Form 8-K Current Report filed by registrant on January 12, 2012. Amended and Restated Certificate of Incorporation incorporated by reference to Exhibit 3.1 to Form 8-K Current Report filed by registrant on May 14, 2010. Certificate of Designations incorporated by reference to Exhibit 3.1 to Form 8-K Current Report filed by registrant on November 18, 2008. Bylaws as restated, incorporated by reference to Exhibit 3.2 to Form 8-K Current Report filed by registrant on May 14, 2010. Instruments defining the rights of security holders, including indentures. The registrant hereby agrees to furnish to the Commission upon request copies of instruments defining the rights of holders of long-term debt of the registrant and its consolidated subsidiaries; no issuance of debt exceeds 10 percent of the assets of the registrant and its subsidiaries on a consolidated basis. Warrant to purchase up to 48,253,677 shares of Common Stock, issued on November 14, 2008 to the United States Department of Treasury, incorporated by reference to Exhibit 4.1 to Form 8-K Current Report filed by registrant on November 18, 2008. Form of stock certificate for the class of Fixed Rate Cumulative Perpetual Preferred Stock Series A, incorporated by reference to Exhibit 4.2 to Form 8-K Current Report filed by registrant on November 18, 2008. 10.1* Regions Financial Corporation 2010 Long Term Incentive Plan, incorporated by reference to Appendix B to Regions Financial Corporation’s Proxy Statement dated April 1, 2010, for the Regions Annual Meeting of Shareholders held May 13, 2010. 225 SEC Assigned Exhibit Number 10.2* 10.3* 10.4* 10.5* 10.6* 10.7* 10.8* 10.9* 10.10* 10.11* 10.12* 10.13* 10.14* 10.15* 10.16* 10.17* Description of Exhibits Amendment, effective August 31, 2010, to Regions Financial Corporation 2010 Long Term Incentive Plan, incorporated by reference to Exhibit 10.1 to Form 10-Q Quarterly Report filed by registrant on November 3, 2010. Form of director restricted stock award agreement and grant notice under Regions Financial Corporation 2010 Long Term Incentive Plan, incorporated by reference to Exhibit 10.2 to Form 10-Q Quarterly Report filed by registrant on August 4, 2010. Form of director restricted stock award agreement and grant notice under Regions Financial Corporation 2010 Long Term Incentive Plan, incorporated by reference to exhibit 10.9 to Form 10-Q Quarterly Report filed by registrant on August 4, 2011. Form of employee restricted stock award agreement and grant notice under Regions Financial Corporation 2010 Long Term Incentive Plan, incorporated by reference to Exhibit 10.3 to Form 10-Q Quarterly Report filed by registrant on August 4, 2010. Form of stock option grant agreement under Regions Financial Corporation 2010 Long Term Incentive Plan, incorporated by reference to Exhibit 10.5 to Form 10-K Annual Report filed by registrant on February 24, 2011. Form of 2009-2010 Annual Salary Stock Unit Award Agreement, incorporated by reference to Exhibit 10.1 to Form 8-K Current Report filed by registrant on December 11, 2009. Form of 2011 Annual Salary Stock Unit Award Agreement, incorporated by reference to Exhibit 10.1 to Form 8-K Current Report filed by registrant on February 25, 2011. Form of TARP Restricted Stock Award Agreement, incorporated by reference to Exhibit 10.2 to Form 8-K Current Report filed by registrant on February 25, 2011. Form of 2012 Annual Salary Stock Unit Award Agreement. AmSouth Bancorporation 2006 Long Term Incentive Compensation Plan, incorporated by reference to Appendix C to AmSouth Bancorporation’s Proxy Statement dated March 10, 2006, for the AmSouth Annual Meeting of Shareholders held April 20, 2006, File No. 1-7476. Form of stock option grant agreement under AmSouth Bancorporation 2006 Long Term Incentive Compensation Plan, incorporated by reference to Exhibit 99.3 to Form 8-K Current Report filed by registrant on April 30, 2007. Form of restricted stock grant agreement under AmSouth Bancorporation 2006 Long Term Incentive Compensation Plan, incorporated by reference to Exhibit 99.4 to Form 8-K Current Report filed by registrant on April 30, 2007. Form of performance unit agreement under AmSouth Bancorporation 2006 Long Term Incentive Compensation Plan and Regions Financial Corporation 2006 Long Term Incentive Plan, incorporated by reference to Exhibit 99.5 to Form 8-K Current Report filed by registrant on April 30, 2007. Form of performance-based stock option grant agreement and award notice under AmSouth Bancorporation 2006 Long Term Incentive Compensation Plan, incorporated by reference to Exhibit 10.4 to Form 10-Q Quarterly Report filed by registrant on May 11, 2009. Regions Financial Corporation 2006 Long Term Incentive Plan, incorporated by reference to Exhibit 99.1 to Form 8-K Current Report filed by registrant on May 23, 2006, File No. 000-50831. Amendment to Regions Financial Corporation 2006 Long-Term Incentive Plan, incorporated by reference to Exhibit 10.5 to Form 10-Q Quarterly Report filed by registrant on May 7, 2008. 226 SEC Assigned Exhibit Number 10.18* 10.19* 10.20* 10.21* 10.22* 10.23* 10.24* 10.25* 10.26* 10.27* 10.28* 10.29* 10.30* 10.31* Description of Exhibits Form of stock option grant agreement under Regions Financial Corporation 2006 Long Term Incentive Plan, incorporated by reference to Exhibit 99.1 to Form 8-K Current Report filed by registrant on April 30, 2007. Form of restricted stock grant agreement under Regions Financial Corporation 2006 Long Term Incentive Plan, incorporated by reference to Exhibit 99.2 to Form 8-K Current Report filed by registrant on April 30, 2007. Form of performance-based stock option grant agreement and award notice under Regions Financial Corporation 2006 Long Term Incentive Plan, incorporated by reference to Exhibit 10.3 to Form 10-Q Quarterly Report filed by registrant on May 11, 2009. Form of performance-based restricted stock agreement and award notice under AmSouth Bancorporation 2006 Long Term Incentive Compensation Plan and Regions Financial Corporation 2006 Long Term Incentive Plan, incorporated by reference to Exhibit 10.5 to Form 10-Q Quarterly Report filed by registrant on May 11, 2009. Form of performance-based restricted stock agreement and award notice applicable to the non-employee members of the Board of Directors under the Regions Financial Corporation 2006 Long Term Incentive Plan, incorporated by reference to Exhibit 10.1 to Form 8-K Current Report filed by registrant on April 22, 2009. Form of director stock option grant agreement under Regions Financial Corporation 2006 Long Term Incentive Plan, incorporated by reference to Exhibit 10.45 to Form 10-K Annual Report filed by registrant on February 26, 2008. Form of 2009 LTI cash award agreement under the Regions Financial Corporation 2006 Long Term Incentive Plan, incorporated by reference to Exhibit 10.19 to Form 10-K Annual Report filed by registrant on February 24, 2011. Form of TARP restricted stock award agreement under the Regions Financial Corporation 2006 Long Term Incentive Plan with John C. Carson, incorporated by reference to Exhibit 10.20 to Form 10-K Annual Report filed by registrant on February 24, 2011. AmSouth Bancorporation 1996 Long Term Incentive Compensation Plan, as amended, incorporated by reference to Exhibit 10.2 to Form 10-Q Quarterly Report filed by AmSouth Bancorporation on November 9, 2004, File No. 1-7476. Amendment Number 1 to the AmSouth Bancorporation 1996 Long Term Incentive Compensation Plan, incorporated by reference to Exhibit 10.1 to Form 10-Q Quarterly Report filed by AmSouth Bancorporation on May 9, 2006, File No. 1-7476. Form of restricted stock grant agreement under AmSouth Bancorporation 1996 Long Term Incentive Compensation Plan, incorporated by reference to Exhibit 10.1 to Form 8-K Current Report filed by AmSouth Bancorporation on April 5, 2006, File No. 1-7476. Form of stock option grant agreement under AmSouth Bancorporation 1996 Long Term Incentive Compensation Plan, incorporated by reference as Exhibit 10.2 to Form 8-K Current Report filed by AmSouth Bancorporation on February 11, 2005, File No. 1-7476. AmSouth Bancorporation Amended and Restated Stock Option Plan for Outside Directors, incorporated by reference to Appendix E to AmSouth Bancorporation’s Proxy Statement dated March 10, 2004, for the Annual Meeting of Shareholders held April 15, 2004, File No. 1-7476. Form of stock option grant agreement under AmSouth Bancorporation Amended and Restated Stock Option Plan for Outside Directors, incorporated by reference to Exhibit 10.1 to Form 8-K Current Report filed by AmSouth Bancorporation on April 26, 2005, File No. 1-7476. 227 SEC Assigned Exhibit Number 10.32* 10.33* 10.34* 10.35* 10.36* 10.37* 10.38* 10.39* 10.40* 10.41* 10.42* 10.43* 10.44* 10.45* Description of Exhibits Amended and Restated Regions Financial Corporation Directors’ Deferred Stock Investment Plan, incorporated by reference to Exhibit 10.27 to Form 10-K Annual Report filed by registrant on February 25, 2009. Amended and Restated Regions Financial Corporation Deferred Compensation Plan for Former Directors of AmSouth Bancorporation (formerly named Deferred Compensation Plan for Directors of AmSouth Bancorporation), incorporated by reference to Exhibit 10.30 to Form 10-K Annual Report filed by registrant on February 25, 2009. First American Corporation Directors’ Deferred Compensation Plan, incorporated by reference to Exhibit 10-a to Form 10-Q Quarterly Report filed by AmSouth Bancorporation on April 30, 2002, File No. 1-7476. Amendment Number 2 to First American Corporation Directors’ Deferred Compensation Plan, incorporated by reference to Exhibit 10.3 to Form 10-Q Quarterly Report filed by registrant on November 9, 2007. Form of deferred compensation agreement implementing deferred compensation arrangements with certain directors who were formerly directors of Union Planters Corporation, incorporated by reference to Exhibit 10.19 to Form 10-K Annual Report filed by registrant on March 14, 2005, File No. 000-50831. AmSouth Bancorporation Deferred Compensation Plan, incorporated by reference to Exhibit 10.13 to Form 10-K Annual Report filed by AmSouth Bancorporation on March 15, 2005, File No. 1-7476. Amendment Number 1 to AmSouth Bancorporation Deferred Compensation Plan effective November 4, 2006, incorporated by reference to Exhibit 10.59 to Form 10-K Annual Report filed by registrant on March 1, 2007. Amendment Number 2 to AmSouth Bancorporation Deferred Compensation Plan, incorporated by reference to Exhibit 10.36 to Form 10-K Annual Report filed by registrant on February 25, 2009. Regions Financial Corporation Executive Bonus Plan, incorporated by reference to Exhibit 99 to Form 8-K Current Report filed by registrant on May 25, 2005, File No. 000-50831. Form of Change-in-Control Agreement for executive officers O. B. Grayson Hall, Jr., David B. Edmonds and John B. Owen, incorporated by reference to Exhibit 10.3 of Form 8-K Current Report filed by registrant on October 3, 2007. Form of Change-in-Control Agreement for executive officer Fournier J. Gale, III, incorporated by reference to Exhibit 10.10 of Form 10-Q Quarterly Report filed by registrant on August 4, 2011. Form of Change-in-Control Agreement for executive officers C. Matthew Lusco and John M. Turner, Jr., incorporated by reference to Exhibit 10.11 of Form 10-Q Quarterly Report filed by registrant on August 4, 2011. Form of Change-in-Control Agreement with executive officers Brett D. Couch, Barbara Godin, C. Keith Herron, David R. Keenan, Scott M. Peters, Cynthia M. Rogers, Ronald G. Smith and David J. Turner, Jr., incorporated by reference to Exhibit 10.48 to Form 10-K Annual Report filed by registrant on February 24, 2011. Form of Change-in-Control Agreement with executive officers John C. Asbury, Ellen S. Jones and William D. Ritter, incorporated by reference to Exhibit 10.49 to Form 10-K Annual Report filed by registrant on February 24, 2011. 228 SEC Assigned Exhibit Number 10.46* 10.47* 10.48* 10.49* 10.50* 10.51* 10.52* 10.53* 10.54* 10.55* 10.56* 10.57* 10.58* 10.59* 10.60* 10.61* Description of Exhibits Form of Change-in-Control Agreement with executive officer John C. Carson, incorporated by reference to exhibit 10.50 to Form 10-K Annual Report filed by registrant on February 24, 2011. Form of Retention RSU Award Notice, incorporated by reference to Exhibit 99.1 to Form 8-K Current Report filed by registrant on October 3, 2007. Form of Retention RSU Award Agreement, incorporated by reference to Exhibit 99.2 to Form 8-K Current Report filed by registrant on October 3, 2007. Amended and Restated Regions Financial Corporation Supplemental 401(k) Plan (formerly named AmSouth Bancorporation Supplemental Thrift Plan), incorporated by reference to Exhibit 10.58 to Form 10-K Annual Report filed by registrant on February 25, 2009. Amendment Number One to the Regions Financial Corporation Supplemental 401(k) Plan, incorporated by reference to Exhibit 10.4 to Form 8-K Current Report filed by registrant on February 27, 2009. Amendment Number Two to the Regions Financial Corporation Supplemental 401(k) Plan, incorporated by reference to Exhibit 10.2 to Form 8-K Current Report filed by registrant on December 18, 2009. Amendment Number Three to the Regions Financial Corporation Supplemental 401(k) Plan, incorporated by reference to Exhibit 10.59 to Form 10-K Annual Report filed by registrant on February 24, 2011. Amendment Number Four to the Regions Financial Corporation Supplemental 401(k) Plan, incorporated by reference to Exhibit 10.60 to Form 10-K Annual Report filed by registrant on February 24, 2011. Amendment Number Five to the Regions Financial Corporation Supplemental 401(k) Plan. Amended and Restated Regions Financial Corporation Post 2006 Supplemental Executive Retirement Plan (formerly named AmSouth Bancorporation Supplemental Retirement Plan), incorporated by reference to Exhibit 10.62 to Form 10-K Annual Report filed by registrant on February 25, 2009. Amendment Number One to the Regions Financial Corporation Post 2006 Supplemental Executive Retirement Plan, incorporated by reference to Exhibit 10.2 to Form 8-K Current Report filed by registrant on February 27, 2009. Amendment Number Two to the Regions Financial Corporation Post 2006 Supplemental Executive Retirement Plan, incorporated by reference to Exhibit 10.5 to Form 8-K Current Report filed by registrant on December 18, 2009. Regions Financial Corporation Post 2006 Supplemental Executive Retirement Plan Amended and Restated as of January 1, 2010, incorporated by reference to Exhibit 10.64 to Form 10-K Annual Report filed by registrant on February 24, 2011. Amendment Number One to the Regions Financial Corporation Post 2006 Supplemental Executive Retirement Plan Amended and Restated Effective as of January 1, 2010, incorporated by reference to Exhibit 10.65 to Form 10-K Annual Report filed by registrant on February 24, 2011. Form of Indemnification Agreement for Directors of AmSouth Bancorporation, incorporated by reference to Exhibit 10.2 to Form 8-K Current Report filed by AmSouth Bancorporation on April 20, 2006, File No. 1-7476. Form of Aircraft Time Sharing Agreement, incorporated by reference to Exhibit 10.1 to Form 10-Q Quarterly Report filed by registrant on November 4, 2009. 229 SEC Assigned Exhibit Number 10.62* 10.63* 10.64* 10.65* 10.66 10.67* 10.68 10.69 10.70 10.71 10.72 10.73 10.74 10.75 12 21 23 24 Description of Exhibits Amended and Restated AmSouth Bancorporation Management Incentive Plan, incorporated by reference to Exhibit 10.46 to Form 10-K Annual Report filed by registrant on February 26, 2008. Regions Financial Corporation Management Incentive Plan, incorporated by reference to Exhibit 10.2 to Form 8-K Current Report filed by registrant on December 11, 2009. Form of Morgan Keegan & Company, Inc. Restricted Cash Agreement for executive officer John C. Carson, incorporated by reference to Exhibit 10.70 to Form 10-K Annual Report filed by registrant on February 24, 2011. Morgan Keegan & Company Amended and Restated Deferred Compensation Plan dated January 1, 2011, incorporated by reference to Exhibit 10.71 to Form 10-K Annual Report filed by registrant on February 24, 2011. Letter Agreement, dated November 14, 2008 including the Securities Purchase Agreement— Standard Terms incorporated by reference therein, between registrant and the U.S. Treasury, incorporated by reference to Exhibit 10.1 to Form 8-K Current Report filed by registrant November 18, 2008. Form of letter agreement and Waiver executed in favor of U.S. Treasury and signed by each of O. B. Grayson Hall, Jr., David C. Edmonds, John B. Owen, and David J. Turner, Jr., incorporated by reference to Exhibit 10.47 to Form 10-K Annual Report filed by registrant on February 25, 2009. Securities and Exchange Commission Order dated June 22, 2011, incorporated by reference to Exhibit 10.1 to Form 8-K Current Report filed by registrant on June 22, 2011. Financial Industry Regulatory Authority Letter of Acceptance, Waiver and Consent, incorporated by reference to Exhibit 10.2 to Form 8-K Current Report filed by registrant on June 22, 2011. Alabama Securities Commission Administrative Consent and Order, incorporated by reference to Exhibit 10.3 to Form 8-K Current Report filed by registrant on June 22, 2011. Kentucky Public Protection Cabinet, Department of Financial Institutions Administrative Consent Order, incorporated by reference to Exhibit 10.4 to Form 8-K Current Report filed by registrant on June 22, 2011. Mississippi Secretary of State Securities and Charities Division Administrative Consent Order, incorporated by reference to Exhibit 10.5 to Form 8-K Current Report filed by registrant on June 22, 2011. South Carolina Securities Commissioner Administrative Consent Order, incorporated by reference to Exhibit 10.6 to Form 8-K Current Report filed by registrant on June 22, 2011. Tennessee Securities Division Consent Order, incorporated by reference to Exhibit 10.7 to Form 8-K Current Report filed by registrant on June 22, 2011. Form of Agreement with other states securities regulators, incorporated by reference to Exhibit 10.8 to Form 8-K Current Report filed by registrant on June 22, 2011. Computation of Ratio of Earnings to Fixed Charges. List of subsidiaries of registrant. Consent of independent registered public accounting firm. Powers of Attorney. 230 SEC Assigned Exhibit Number Description of Exhibits 31.1 31.2 32 99.1 99.2 101 Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Certifications of Principal Executive Officer pursuant to 31 C.F.R. § 30.15. Certifications of Principal Financial Officer pursuant to 31 C.F.R. § 30.15. Interactive Data File * Compensatory plan or agreement. Copies of exhibits not included herein may be obtained free of charge, electronically through Regions’ website at www.regions.com or through the SEC’s website at www.sec.gov or upon request to: Investor Relations Regions Financial Corporation 1900 Fifth Avenue North Birmingham, Alabama 35203 (205) 326-5807 231 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES REGIONS FINANCIAL CORPORATION By: /S/ O. B. GRAYSON HALL, JR. O. B. Grayson Hall, Jr. President and Chief Executive Officer Date: February 24, 2012 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /S/ O. B. GRAYSON HALL, JR. O. B. Grayson Hall, Jr. President, Chief Executive Officer, and Director (principal executive officer) February 24, 2012 /S/ DAVID J. TURNER, JR. David J. Turner, Jr. /S/ HARDIE B. KIMBROUGH, JR. Hardie B. Kimbrough, Jr. Senior Executive Vice President and Chief Financial Officer (principal financial officer) Executive Vice President and Controller (principal accounting officer) Director Director Director Director * Samuel W. Bartholomew, Jr. * George W. Bryan * Carolyn H. Byrd * David J. Cooper, Sr. * Earnest W. Deavenport, Jr. * Don DeFosset * Eric C. Fast Chairman of the Board, Director February 24, 2012 Director Director 232 February 24, 2012 February 24, 2012 February 24, 2012 February 24, 2012 February 24, 2012 February 24, 2012 February 24, 2012 February 24, 2012 Signature * John D. Johns * James R. Malone * Ruth Ann Marshall * Susan W. Matlock * John E. Maupin, Jr. * Charles D. McCrary * John R. Roberts * Lee J. Styslinger III Director Director Director Director Director Director Director Director Title Date February 24, 2012 February 24, 2012 February 24, 2012 February 24, 2012 February 24, 2012 February 24, 2012 February 24, 2012 February 24, 2012 * Fournier J. Gale, III, by signing his name hereto, does sign this document on behalf of each of the persons indicated above pursuant to powers of attorney executed by such persons and filed with the Securities and Exchange Commission. By: /S/ FOURNIER J. GALE, III Fournier J. Gale, III Attorney in Fact 233 Regions Financial Corporation Computation of Ratio of Earnings to Fixed Charges (from continuing operations) (Unaudited) EXHIBIT 12 December 31 2011 2010 2009 2008 2007 (Dollars in millions) Excluding Interest on Deposits Income (loss) from continuing operations before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 161 $ (844) $(1,268) $(6,032) $1,879 Fixed charges excluding preferred stock dividends and accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) for computation excluding interest on deposits . . . Interest expense excluding interest on deposits . . . . . . . . . . . . . . . One-third of rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred stock dividends and accretion . . . . . . . . . . . . . . . . . . . . Fixed charges including preferred stock dividends . . . . . . . . . . . . Ratio of earnings to fixed charges, excluding interest on 425 586 370 55 214 639 550 766 1,007 950 (294) (502) (5,025) 2,829 493 57 224 774 707 59 230 996 953 54 26 1,033 893 57 — 950 deposits 0.92x (0.38)x (0.50)x (4.86)x 2.98x Including Interest on Deposits Income (loss) from continuing operations before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 161 $ (844) $(1,268) $(6,032) $1,879 Fixed charges excluding preferred stock dividends and accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 897 1,305 2,043 2,731 3,614 Income (loss) for computation including interest on deposits . . . 1,058 Interest expense including interest on deposits . . . . . . . . . . . . . . . One-third of rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred stock dividends and accretion . . . . . . . . . . . . . . . . . . . . 842 55 214 Fixed charges including preferred stock dividends . . . . . . . . . . . . 1,111 461 1,248 57 224 1,529 775 (3,301) 5,493 1,984 59 230 2,273 2,677 54 26 2,757 3,557 57 — 3,614 Ratio of earnings to fixed charges, including interest on deposits 0.95x 0.30x 0.34x (1.20)x 1.52x EXHIBIT 31.1 I, O. B. Grayson Hall, Jr., certify that: CERTIFICATIONS 1. I have reviewed this annual report on Form 10-K of Regions Financial Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: February 24, 2012 /S/ O. B. GRAYSON HALL, JR. O. B. Grayson Hall, Jr. President and Chief Executive Officer EXHIBIT 31.2 I, David J. Turner, Jr., certify that: CERTIFICATIONS 1. I have reviewed this annual report on Form 10-K of Regions Financial Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: February 24, 2012 /S/ DAVID J. TURNER, JR. David J. Turner, Jr. Senior Executive Vice President and Chief Financial Officer CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 EXHIBIT 32 In connection with the Annual Report of Regions Financial Corporation (the “Company”) on Form 10-K for the year ending December 31, 2011 (the “Report”), I, O. B. Grayson Hall, Jr., Chief Executive Officer of the Company, and David J. Turner, Jr., Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge: 1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /S/ O. B. GRAYSON HALL, JR. O. B. Grayson Hall, Jr. President and Chief Executive Officer DATE: February 24, 2012 /S/ DAVID J. TURNER, JR. David J. Turner, Jr. Senior Executive Vice President and Chief Financial Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signatures that appear in typed form within the electronic version of this written statement required by Section 906, has been provided to Regions Financial Corporation and will be retained by Regions Financial Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EXHIBIT 99.1 ANNUAL CERTIFICATION PURSUANT TO 31 C.F.R. § 30.15 I, O. B. Grayson Hall, Jr., President and Chief Executive Officer of Regions Financial Corporation, certify, based on my knowledge, that: (i) (ii) The compensation committee of Regions Financial Corporation has discussed, reviewed, and evaluated with senior risk officers at least every six months during any part of the most recently completed fiscal year that was a TARP period, the senior executive officer (SEO) compensation plans and the employee compensation plans and the risks these plans pose to Regions Financial Corporation; The compensation committee of Regions Financial Corporation has identified and limited during any part of the most recently completed fiscal year that was a TARP period any features of the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Regions Financial Corporation, has identified any features of the employee compensation plans that pose risks to Regions Financial Corporation and has limited those features to ensure that Regions Financial Corporation is not unnecessarily exposed to risks; (iii) The compensation committee has reviewed, at least every six months during any part of the most recently completed fiscal year that was a TARP period, the terms of each employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of Regions Financial Corporation to enhance the compensation of an employee, and has limited any such features; (iv) The compensation committee of Regions Financial Corporation will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii) above; (v) The compensation committee of Regions Financial Corporation will provide a narrative description of how it limited during any part of the most recently completed fiscal year that was a TARP period the features in (A) SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Regions Financial Corporation; (B) Employee compensation plans that unnecessarily expose Regions Financial Corporation to risks; and (C) Employee compensation plans that could encourage the manipulation of reported earnings of Regions Financial Corporation to enhance the compensation of an employee; (vi) Regions Financial Corporation has required that bonus payments to the SEOs or any of the next twenty most highly compensated employees, as defined in the regulations and guidance established under section 111 of EESA (bonus payments), be subject to a recovery or “clawback” provision during any part of the most recently completed fiscal year that was a TARP period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria; (vii) Regions Financial Corporation has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to an SEO or any of the next five most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period; (viii) Regions Financial Corporation has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established thereunder during any part of the most recently completed fiscal year that was a TARP period; (ix) Except as disclosed to the Special Master for TARP Executive Compensation (“Special Master”), Regions Financial Corporation and its employees have complied with the excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, during any part of the most recently completed fiscal year that was a TARP period; and except as disclosed to the Special Master, any expenses that, pursuant to this policy, required approval of the board of directors, a committee of the board of directors, an SEO, or an executive officer with a similar level of responsibility were properly approved; (x) Regions Financial Corporation will permit a non-binding shareholder resolution in compliance with any applicable Federal securities rules and regulations on the disclosures provided under the Federal securities laws related to SEO compensation paid or accrued during any part of the most recently completed fiscal year that was a TARP period; (xi) Regions Financial Corporation will disclose the amount, nature, and justification for the offering during any part of the most recently completed fiscal year that was a TARP period of any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for any employee who is subject to the bonus payment limitations identified in paragraph (viii); (xii) Regions Financial Corporation will disclose whether Regions Financial Corporation, the board of directors of Regions Financial Corporation, or the compensation committee of Regions Financial Corporation has engaged during any part of the most recently completed fiscal year that was a TARP period, a compensation consultant; and the services the compensation consultant or any affiliate of the compensation consultant provided during this period; (xiii) Regions Financial Corporation has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under section 111 of EESA, to the SEOs and the next twenty most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period; (xiv) Regions Financial Corporation has substantially complied with all other requirements related to employee compensation that are provided in the agreement between Regions Financial Corporation and Treasury, including any amendments; (xv) Regions Financial Corporation has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year , with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title, and employer of each SEO and most highly compensated employee identified; and (xvi) I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both. (See, for example, 18 U.S.C. 1001.) Date: February 23, 2012 /S/ O. B. GRAYSON HALL, JR. O. B. Grayson Hall, Jr. President and Chief Executive Officer EXHIBIT 99.2 ANNUAL CERTIFICATION PURSUANT TO 31 C.F.R. § 30.15 I, David J. Turner, Jr., Senior Executive Vice President and Chief Financial Officer of Regions Financial Corporation, certify, based on my knowledge, that: (i) (ii) The compensation committee of Regions Financial Corporation has discussed, reviewed, and evaluated with senior risk officers at least every six months during any part of the most recently completed fiscal year that was a TARP period, the senior executive officer (SEO) compensation plans and the employee compensation plans and the risks these plans pose to Regions Financial Corporation; The compensation committee of Regions Financial Corporation has identified and limited during any part of the most recently completed fiscal year that was a TARP period any features of the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Regions Financial Corporation, has identified any features of the employee compensation plans that pose risks to Regions Financial Corporation and has limited those features to ensure that Regions Financial Corporation is not unnecessarily exposed to risks; (iii) The compensation committee has reviewed, at least every six months during any part of the most recently completed fiscal year that was a TARP period, the terms of each employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of Regions Financial Corporation to enhance the compensation of an employee, and has limited any such features; (iv) The compensation committee of Regions Financial Corporation will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii) above; (v) The compensation committee of Regions Financial Corporation will provide a narrative description of how it limited during any part of the most recently completed fiscal year that was a TARP period the features in (A) SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Regions Financial Corporation; (B) Employee compensation plans that unnecessarily expose Regions Financial Corporation to risks; and (C) Employee compensation plans that could encourage the manipulation of reported earnings of Regions Financial Corporation to enhance the compensation of an employee; (vi) Regions Financial Corporation has required that bonus payments to the SEOs or any of the next twenty most highly compensated employees, as defined in the regulations and guidance established under section 111 of EESA (bonus payments), be subject to a recovery or “clawback” provision during any part of the most recently completed fiscal year that was a TARP period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria; (vii) Regions Financial Corporation has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to an SEO or any of the next five most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period; (viii) Regions Financial Corporation has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established thereunder during any part of the most recently completed fiscal year that was a TARP period; (ix) Except as disclosed to the Special Master for TARP Executive Compensation (“Special Master”), Regions Financial Corporation and its employees have complied with the excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, during any part of the most recently completed fiscal year that was a TARP period; and except as disclosed to the Special Master, any expenses that, pursuant to this policy, required approval of the board of directors, a committee of the board of directors, an SEO, or an executive officer with a similar level of responsibility were properly approved; (x) Regions Financial Corporation will permit a non-binding shareholder resolution in compliance with any applicable Federal securities rules and regulations on the disclosures provided under the Federal securities laws related to SEO compensation paid or accrued during any part of the most recently completed fiscal year that was a TARP period; (xi) Regions Financial Corporation will disclose the amount, nature, and justification for the offering during any part of the most recently completed fiscal year that was a TARP period of any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for any employee who is subject to the bonus payment limitations identified in paragraph (viii); (xii) Regions Financial Corporation will disclose whether Regions Financial Corporation, the board of directors of Regions Financial Corporation, or the compensation committee of Regions Financial Corporation has engaged during any part of the most recently completed fiscal year that was a TARP period, a compensation consultant; and the services the compensation consultant or any affiliate of the compensation consultant provided during this period; (xiii) Regions Financial Corporation has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under section 111 of EESA, to the SEOs and the next twenty most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period; (xiv) Regions Financial Corporation has substantially complied with all other requirements related to employee compensation that are provided in the agreement between Regions Financial Corporation and Treasury, including any amendments; (xv) Regions Financial Corporation has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title, and employer of each SEO and most highly compensated employee identified; and (xvi) I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both. (See, for example, 18 U.S.C. 1001.) Date: February 23, 2012 /S/ DAVID J. TURNER, JR. David J. Turner, Jr. Senior Executive Vice President and Chief Financial Officer FOR MORE INFORMATION Regions Financial Corporation Investor Relations 1900 Fifth Avenue North Birmingham, AL 35203 regions.com M. List Underwood Jr. Director of Investor Relations (205) 801-0265 Dana W. Nolan Associate Director of Investor Relations (205) 326-4803 Helen S. Johnson Shareholder Services Manager (205) 326-5807 The paper used to create this publication follows the guidelines of the Forest Stewardship Council™. The FSC® standard for environmental responsibility in forest management is recognized around the world. This paper contains at least 10% post-consumer waste. I R E G O N S 2 0 1 1 A N N U A L R E P O R T T O S H A R E H O L D E R S 2011