NOTE 13—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.

See Note 1 “Summary of Significant Accounting Policies” to the consolidated financial statements of the 2011 Annual Report on Form 10-K for a description of valuation methodologies for assets and liabilities measured at fair value on a recurring and non-recurring basis. Regions rarely transfers assets and liabilities measured at fair value between Level 1 and Level 2 measurements. There were no such transfers during the six month periods ended June 30, 2012 and 2011. Trading account assets are periodically transferred into or out of 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.

The following tables present assets and liabilities measured at fair value on a recurring basis and non-recurring basis as of June 30, 2012 and December 31, 2011:


	June 30, 2012								December 31, 2011
	Level 1		Level 2		Level 3		Total Fair Value		Level 1		Level 2		Level 3		Total Fair Value
	(In millions)
Recurring fair value measurements
Trading account assets
U.S. Treasury securities	$	—	$	—	$	—	$	—	$	212	$	3	$	—	$	215
Obligations of states and political subdivisions		—		—		—		—		—		101		139		240
Mortgage-backed securities:
Residential agency		—		—		—		—		—		359		—		359
Commercial agency		—		—		—		—		—		—		51		51
Other securities		—		—		—		—		—		35		1		36
Equity securities		110		—		—		110		365		—		—		365

Total trading account assets (1)	$	110	$	—	$	—	$	110	$	577	$	498	$	191	$	1,266

Securities available for sale
U.S. Treasury securities	$	51	$	—	$	—	$	51	$	98	$	—	$	—	$	98
Federal agency securities		—		235		—		235		—		147		—		147
Obligations of states and political subdivisions		—		14		—		14		—		16		20		36
Mortgage-backed securities:
Residential agency		—		23,494		—		23,494		—		22,175		—		22,175
Residential non-agency		—		—		14		14		—		—		16		16
Commercial agency		—		514		—		514		—		326		—		326
Commercial non-agency		—		637		—		637		—		321		—		321
Other debt securities		—		1,549		2		1,551		—		537		—		537
Equity securities (2)		107		—		—		107		115		—		—		115

Total securities available for sale	$	158	$	26,443	$	16	$	26,617	$	213	$	23,522	$	36	$	23,771

Mortgage loans held for sale	$	—	$	950	$	—	$	950	$	—	$	844	$	—	$	844

Mortgage servicing rights	$	—	$	—	$	179	$	179	$	—	$	—	$	182	$	182

Derivative assets
Interest rate swaps	$	—	$	2,059	$	—	$	2,059	$	—	$	2,758	$	—	$	2,758
Interest rate options		—		4		30		34		—		28		13		41
Interest rate futures and forward commitments		—		8		—		8		—		11		—		11
Other contracts		—		48		—		48		—		43		—		43

Total derivative assets (3) (4)	$	—	$	2,119	$	30	$	2,149	$	—	$	2,840	$	13	$	2,853

Trading account liabilities
U.S. Treasury securities	$	—	$	—	$	—	$	—	$	—	$	97	$	—	$	97
Obligations of states and political subdivisions		—		—		—		—		—		2		—		2
Mortgage-backed securities:
Residential agency		—		—		—		—		—		133		—		133
Commercial agency		—		—		—		—		—		—		5		5
Other securities		—		—		—		—		—		16		2		18
Equity securities		—		—		—		—		1		—		—		1

Total trading account liabilities (5)	$	—	$	—	$	—	$	—	$	1	$	248	$	7	$	256

Derivative liabilities
Interest rate swaps	$	—	$	1,953	$	—	$	1,953	$	—	$	2,416	$	—	$	2,416
Interest rate options		—		4		—		4		—		28		—		28
Interest rate futures and forward commitments		—		22		—		22		—		34		—		34
Other contracts		—		46		—		46		—		36		—		36

Total derivative liabilities (3) (4)	$	—	$	2,025	$	—	$	2,025	$	—	$	2,514	$	—	$	2,514

Nonrecurring fair value measurements
Loans held for sale	$	—	$	31	$	77	$	108	$	—	$	36	$	195	$	231
Foreclosed property, other real estate and equipment		—		70		48		118		—		91		162		253

(1)

All trading account assets at December 31, 2011 were related to Morgan Keegan (see Note 2 for further discussion regarding the sale of Morgan Keegan) with the exception of $178 million of which all were classified as Level 1 in the table. The Morgan Keegan items do not appear in the June 30, 2012 amounts, as the sale was closed during the second quarter of 2012.

(2)	Excludes Federal Reserve Bank and Federal Home Loan Bank stock totaling $480 million and $135 million at June 30, 2012 and $481 million and $219 million December 31, 2011, respectively.

(3)

At June 30, 2012, derivatives include approximately $1.2 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 $57 million and cash collateral posted of $881 million with counterparties. 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.

(4)

Derivative assets and liabilities both include $454 million of interest rate swaps and $23 million of interest rate options at December 31, 2011 related to Morgan Keegan, all of which are classified as Level 2 in the table. These items do not appear in the June 30, 2012 amounts, as they were included with the sale of Morgan Keegan.

(5)	All trading account liabilities are related to Morgan Keegan at December 31, 2011. These items do not appear in the June 30, 2012 amounts as they were included with the sale of Morgan Keegan.

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.

The following tables illustrate a rollforward for all assets and (liabilities) measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months and six ended June 30, 2012 and 2011, respectively. 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).


	Three Months Ended June 30, 2012
																												Net change in unrealized gains (losses) in included in earnings related to assets and liabilities held at June 30, 2012
						Total Realized / Unrealized Gains or Losses
	Opening Balance April 1, 2012		Disposition of Morgan Keegan			Included in Earnings			Included in Other Compre- hensive Income (Loss)		Purchases		Sales			Issuances		Settlements			Transfers into Level 3		Transfers out of Level 3			Closing Balance June 30, 2012
	(In millions)
Level 3 Instruments Only
Trading account assets:
Obligations of states and political subdivisions	$	124		(124	)		—			—		—		—			—		—			—		—		$	—	$	—
Commercial agency MBS		104		(104	)		—			—		—		—			—		—			—		—			—		—
Other securities		13		(13	)		—			—		—		—			—		—			—		—			—		—

Total trading account assets (b)	$	241		(241	)		—			—		—		—			—		—			—		—		$	—	$	—

Securities available for sale:
Obligations of states and political subdivisions	$	16		—			—			—		—		(16	)		—		—			—		—		$	—	$	—
Residential non-agency MBS		15		—			—			—		—		—			—		(1	)		—		—			14		—
Other debt securities		3		—			—			—		—		—			—		—			—		(1	)		2		—

Total securities available for sale	$	34		—			—			—		—		(16	)		—		(1	)		—		(1	)	$	16	$	—

Mortgage servicing rights	$	199		—			(34	)(a)		—		14		—			—		—			—		—		$	179	$	(26	)(a)

Trading account liabilities:
Mortgage-backed securities:
Commercial agency	$	42		(42	)		—			—		—		—			—		—			—		—		$	—	$	—
Other securities		10		(10	)		—			—		—		—			—		—			—		—			—		—

Total trading account liabilities (b)	$	52		(52	)		—			—		—		—			—		—			—		—		$	—	$	—

Derivatives, net:
Interest rate options	$	18		—			70			—		—		—			—		(58	)		—		—		$	30	$	30	(a)

Total derivatives, net	$	18		—			70	(a)		—		—		—			—		(58	)		—		—		$	30	$	30	(a)

(a)	Included in mortgage income.

(b)	All amounts related to trading account assets and trading account liabilities are related to Morgan Keegan (see Note 2 for discussion of sale of Morgan Keegan).


	Three Months Ended June 30, 2011
																										Net change in unrealized gains (losses) included in earnings related to assets and liabilities held at June 30, 2011
			Total Realized / Unrealized Gains or Losses
	Opening Balance April 1, 2011		Included in Earnings			Included in Other Compre- hensive Income (Loss)			Purchases			Sales			Issuances		Settlements			Transfers into Level 3		Transfers out of Level 3		Closing Balance June 30, 2011
	(In millions)
Level 3 Instruments Only
Trading account assets (c):
Obligations of states and political subdivisions	$	162		3			—			2			—			—		(19	)		—		—	$	148	$	—
Commercial agency MBS		84		2			—			312			—			—		(337	)		—		—		61		—
Other securities		6		6			—			2,249			—			—		(2,256	)		—		—		5		—

Total trading account assets (d)	$	252		11	(a)		—			2,563			—			—		(2,612	)		—		—	$	214	$	—

Securities available for sale:
Obligations of states and political subdivisions	$	17		—			—			—			—			—		—			—		—	$	17	$	—
Residential non-agency MBS		20		1			(1	)		—			(2	)		—		(1	)		—		—		17		—

Total securities available for sale	$	37		1			(1	)		—			(2	)		—		(1	)		—		—	$	34	$	—

Mortgage servicing rights	$	282		(33	)(b)		—			19			—			—		—			—			$	268	$	(28	)(b)

Trading account liabilities (c):
Mortgage-backed securities:
Commercial agency	$	13		—			—			—			—			—		3			—		—	$	16	$	—
Other securities		12		—			—			(18	)		—			—		11			—		—		5		—

Total trading account liabilities (d)	$	25		—			—			(18	)		—			—		14			—		—	$	21	$

Derivatives, net:
Interest rate options	$	5		25	(b)		—			—			—			—		(25	)		—		—	$	5	$	5	(b)
Interest rate futures and forward commitments		3		—			—			—			—			—		1			—		—		4		—

Total derivatives, net	$	8		25			—			—			—			—		(24	)		—		—	$	9	$	5

(a)	Included in discontinued operations, on a net basis.

(b)	Included in mortgage income.

(c)	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 2 for discussion of sale of Morgan Keegan).


	Six Months Ended June 30, 2012
																													Net change in unrealized gains (losses) included in earnings related to assets and liabilities held at June 30, 2012
			Total Realized / Unrealized Gains or Losses
	Opening Balance January 1, 2012		Included in Earnings			Included in Other Compre- hensive Income (Loss)			Purchases		Sales			Issuances		Settlements			Transfers into Level 3		Transfers out of Level 3			Disposition of Morgan Keegan			Closing Balance June 30, 2012
	(In millions)
Level 3 Instruments Only
Trading account assets: (c)
Obligations of states and political subdivisions	$	139		(3	)		—			4		—			—		(16	)		—		—		$	(124	)		—	$	—
Commercial agency MBS		51		2			—			368		—			—		(317	)		—		—			(104	)		—		—
Other securities		1		4			—			2,248		—			—		(2,240	)		—		—			(13	)		—		—

Total trading account assets (d)	$	191		3	(a)		—			2,620		—			—		(2,573	)		—		—		$	(241	)		—	$	—

Securities available for sale:
Obligations of states and political subdivisions	$	20		—			(2	)		—		(16	)		—		(2	)		—		—		$	—			—	$	—
Residential non-agency MBS		16		—			—			—		—			—		(2	)		—		—			—			14		—
Other debt securities		—		—			—			—		—			—		—			3		(1	)		—			2		—

Total securities available for sale	$	36		—			(2	)		—		(16	)		—		(4	)		3		(1	)	$	—			16	$	—

Mortgage servicing rights	$	182		(31	)(b)		—			28		—			—		—			—		—		$	—			179	$	(17	)(b)

Trading account liabilities: (c)
Mortgage-backed securities:
Commercial agency	$	5		—			—			37		—			—		—			—		—		$	(42	)		—	$	—
Other securities		2		—			—			12		—			—		(4	)		—		—			(10	)		—		—

Total trading account liabilities (d)	$	7		—			—			49		—			—		(4	)		—		—		$	(52	)		—	$	—

Derivatives, net:
Interest rate options	$	13		111			—			—		—			—		(94	)		—		—		$	—			30	$	48	(b)

Total derivatives, net	$	13		111	(b)		—			—		—			—		(94	)		—		—		$	—			30	$	48	(b)

(a)	Included in discontinued operations, on a net basis.

(b)	Included in mortgage income.

(c)	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 2 for discussion of sale of Morgan Keegan).


	Six Months Ended June 30, 2011
																										Net change in unrealized gains (losses) included in earnings related to assets and liabilities held at June 30, 2011
			Total Realized / Unrealized Gains or Losses
	Opening Balance January 1, 2011		Included in Earnings			Included in Other Compre- hensive Income (Loss)			Purchases			Sales			Issuances		Settlements			Transfers into Level 3		Transfers out of Level 3		Closing Balance June 30, 2011
	(In millions)
Level 3 Instruments Only
Trading account assets: (c)
Obligations of states and political subdivisions	$	165		2			—			8			—			—		(27	)		—		—	$	148	$	—
Commercial agency MBS		54		3			—			477			—			—		(474	)		1		—		61		—
Other securities		10		11			—			4,278			—			—		(4,294	)		—		—		5		—

Total trading account assets (d)	$	229		16	(a)		—			4,763			—			—		(4,795	)		1		—	$	214	$	—

Securities available for sale:
Obligations of states and political subdivisions	$	17		—			—			—			—			—		—			—		—	$	17	$	—
Residential non-agency MBS		22		1			(1	)		—			(2	)		—		(3	)		—		—		17		—

Total securities available for sale	$	39		1			(1	)		—			(2	)		—		(3	)		—		—	$	34	$	—

Mortgage servicing rights	$	267		(34	)(b)		—			35			—			—		—			—		—	$	268	$	(23	)(b)

Trading account liabilities: (c)
Mortgage-backed securities:
Commercial agency	$	6		—			—			—			—			—		10			—		—	$	16	$	—
Other securities		4		—			—			(27	)		—			—		28			—		—		5		—

Total trading account liabilities (d)	$	10		—			—			(27	)		—			—		38			—		—	$	21	$	—

Derivatives, net:
Interest rate options	$	3		40			—			—			—			—		(38	)		—		—	$	5	$	5	(b)
Interest rate futures and forward commitments		5		—			—			—			—			—		(1	)		—		—		4		—

Total derivatives, net	$	8		40	(b)		—			—			—			—		(39	)		—		—	$	9	$	5	(b)

(a)	Included in discontinued operations, on a net basis.

(b)	Included in mortgage income.

(c)	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 2 for discussion of sale of Morgan Keegan).

The following table presents the fair value adjustments related to non-recurring fair value measurements:


	Three Months Ended June 30						Six Months Ended June 30
	2012			2011			2012			2011
	(In millions)
Loans held for sale	$	(45	)	$	(198	)	$	(101	)	$	(305	)
Foreclosed property, other real estate and equipment		(19	)		(97	)		(38	)		(137	)

The following table presents detailed information regarding assets and liabilities measured at fair value using significant unobservable inputs (Level 3) as of June 30, 2012. The table includes the valuation techniques and the significant unobservable inputs utilized. The range of each unobservable input as well as the weighted average within the range utilized at June 30, 2012 is included. Following the table is a description of the valuation technique and the sensitivity of the technique to changes in the significant unobservable input.


	June 30, 2012
	Level 3 Fair Value at June 30, 2012		Valuation Technique	Unobservable Input(s)	Quantitative Range of Unobservable Inputs and (Weighted-Average)
	(Dollars in millions)
Recurring fair value measurements:

Securities available for sale:

Mortgage-backed securities:
Residential non-agency	$	14	Discounted cash flow	Spread to LIBOR	5.3% - 69.8% (17.3%)
				Weighted-average prepayment speed (CPR; percentage)	8.8% - 32.3% (12.7%)
				Probability of default	0.2% - 1.2% (1.0%)
				Loss severity	40.4% - 100% (49.4%)

Other debt securities	$	2	Comparable Quote	Evaluated quote on same issuer/comparable bond	97.9% - 100% (99.2%)
				Comparability adjustments	2.1% (2.1%)

Mortgage servicing rights (a)	$	179	Discounted cash flow	Weighted-average prepayment speed (CPR; percentage)	5.3% - 30.6% (18.4%)
				Option-adjusted spread (basis points)	9.5 - 32.0 (1,332)
Derivative assets
Interest rate options	$	30	Discounted cash flow	Weighted-average prepayment speed (CPR; percentage)	5.3% - 30.6% (18.4%)
				Option-adjusted spread (basis points)	9.5 - 32.0 (1,332)
				Pull-through	33.3% - 99.8% (75.8%)
Nonrecurring fair value measurements:

Loans held for sale	$	77	Multiple data points, including discount to appraised value of collateral based on recent market activity for sales of similar loans	Appraisal compatability adjustment (discount)	0.0% - 84.0% (44.6%)
Foreclosed property and other real estate	$	48	Discount to appraised value of property based on recent market activity for sales of similar properties	Appraisal compatability adjustment (discount)	4.5% - 93.3% (46.5%)

(a)	See Note 5 for additional disclosures related to assumptions used in the fair value calculation for mortgage servicing rights.

RECURRING FAIR VALUE MEASUREMENTS USING SIGNIFICANT UNOBSERVABLE INPUTS

Securities available for sale

Mortgage backed securities: residential non-agency—The fair value reported in this category relates to retained interests in legacy securitizations. Significant unobservable inputs include the spread to LIBOR, constant prepayment rate, probability of default, and loss severity in the event of default. Significant increases in any of these inputs in isolation would result in significantly lower fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for loss severity and a directionally opposite change in the assumption used for prepayment rates.

Other debt securities—Significant unobservable inputs include evaluated quotes on comparable bonds for the same issuer and management-determined comparability adjustments. Changes in the evaluated quote on comparable bonds would result in a directionally similar change in the fair value of the other debt securities.

Mortgage Servicing Rights

The significant unobservable inputs used in the fair value measurement of mortgage servicing rights are option adjusted spreads (“OAS”) and prepayment speed. This method requires generating cash flow projections over multiple interest rate scenarios and discounting those cash flows at a risk adjusted rate. Additionally, the impact of prepayments and changes in the option adjusted spread are based on a variety of underlying inputs such as servicing costs. Increases or decreases to the underlying cash flow inputs will have a corresponding impact on the value of the MSR asset. See Note 5 for additional disclosures related to assumptions used in the fair value calculation for mortgage servicing rights.

Derivative assets

Interest rate options—These instruments are interest rate lock agreements made in the normal course of originating residential mortgage loans. Significant unobservable inputs in the fair value measurement are OAS, prepayment speeds, and pull-through. The impact of OAS and prepayment speed inputs in the valuation of these derivative instruments are consistent with the MSR discussion above. Pull-through is an estimate of the number of interest rate lock commitments that will ultimately become funded loans. Increases or decreases in the pull-through assumption will have a corresponding impact on the value of these derivative assets.

NON-RECURRING FAIR VALUE MEASUREMENTS USING SIGNIFICANT UNOBSERVABLE INPUTS

Loans held for sale

Loans held for sale are valued based on multiple data points indicating the fair value for each loan. The primary data point for non-performing investor real estate loans is a discount to the appraised value of the underlying collateral, which considers the return required by potential buyers of the loans. Management establishes this discount or comparability adjustment based on recent sales of loans secured by similar property types. As liquidity in the market increases or decreases, the comparability adjustment and the resulting asset valuation are impacted.

Foreclosed property and other real estate

Foreclosed property and other real estate are valued based on offered quotes as available. If no sales contract is pending for a specific property, management establishes a comparability adjustment to the appraised value based on historical activity considering proceeds for properties sold versus the corresponding appraised value. Increases or decreases in realization for properties sold impact the comparability adjustment for similar assets remaining on the balance sheet.

FAIR VALUE OPTION

Regions 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 are recorded in loans held for sale in the consolidated balance sheets.

The following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for mortgage loans held for sale measured at fair value:


	June 30, 2012						December 31, 2011
	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	$	950	$	908	$	42	$	844	$	815	$	29

Interest income on mortgage loans held for sale is recognized based on contractual rates and is reflected in interest income on loans held for sale in the consolidated statements of income. The following table details net gains resulting from changes in fair value of these loans which were recorded in mortgage income in the consolidated statements of income during the three months and six months ended June 30, 2012 and 2011, respectively. These changes in fair value are mostly offset by economic hedging activities. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk.


	Mortgage loans held for sale, at fair value
	Three Months Ended June 30				Six Months Ended June 30
	2012		2011		2012		2011
	(In millions)
Net gains resulting from changes in fair value	$	22	$	5	$	12	$	23

FAIR VALUE OF FINANCIAL INSTRUMENTS

For items measured at fair value on either a recurring or non-recurring basis, a description of the valuation methodology as well as within which strata of the fair value hierarchy the measurement falls is detailed in the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2011. For financial instruments whose fair values are estimated for disclosure purposes only, the following methods and assumptions were used:

Cash and cash equivalents: The carrying amounts reported in the consolidated balance sheets and cash flows approximate the estimated fair values. Because these amounts generally relate to either currency or highly liquid assets, these are considered a Level 1 valuation.

Securities held to maturity: The fair values of securities held to maturity are estimated in the same manner as the corresponding securities available for sale, which are measured at fair value on a recurring basis.

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 creditworthiness. Discounted future cash flow analyses are performed for the groupings incorporating assumptions of current and projected prepayment speeds and expected loss. 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). Because the current liquidity spreads are generally not observable in the market and the expected loss assumptions are based on the Company’s experience, these are Level 3 valuations.

Other interest-earning assets: The carrying amounts reported in the consolidated balance sheets approximate the estimated fair values. While these instruments are not actively traded in the market, the majority of the inputs required to value them are actively quoted and can be validated through external sources. Accordingly, these are Level 2 valuations.

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. These are Level 2 valuations.

Short-term and long-term borrowings: The carrying amounts of short-term borrowings reported in the consolidated balance sheets approximate the estimated fair values, and are considered Level 2 measurements as similar instruments are traded in active markets. The fair values of certain long-term borrowings are estimated using quoted market prices of identical instruments, and are considered Level 1 measurements. If identical instruments are not available, fair values are estimated using quoted market prices for similar instruments and are considered Level 2 valuations. Otherwise, valuations are based on a combination of non-binding broker quotes and quoted prices for identical instruments in non-active markets and are considered Level 3 valuations.

Loan commitments and letters of credit: The estimated fair values for these off-balance sheet instruments are based on probabilities of funding to project future loan fundings, which are discounted using the loan methodology described above. The premiums/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. Because the probabilities of funding and loan valuations are not observable in the market and are considered company specific inputs, these are Level 3 valuations.

Indemnification obligation: The estimated fair value of the indemnification obligation was determined through the use of a present value calculation that takes into account the future cash flows that a market participant would expect to receive from holding the indemnification liability as an asset. Regions performed a probability-weighted cash flow analysis and discounted the result at a credit-adjusted risk free rate. Because the future cash flows and probability weights are company-specific inputs, this is a Level 3 valuation.

The carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of the Company’s financial instruments as of June 30, 2012 are as follows:


	June 30, 2012
	Carrying Amount		Estimated Fair Value (1)		Level 1		Level 2		Level 3
	(In millions)
Financial assets:
Cash and cash equivalents	$	3,766	$	3,766	$	3,766	$	—	$	—
Trading account assets		110		110		110		—		—
Securities available for sale		27,232		27,232		158		27,058		16
Securities held to maturity		13		14		3		11		—
Loans held for sale		1,187		1,187		—		981		206
Loans (excluding leases), net of unearned income and allowance for loan losses (2), (3)		72,427		65,046		—		—		65,046
Other interest-earning assets		901		901		—		901		—
Derivatives, net		124		124		—		94		30
Financial liabilities:
Deposits		95,098		95,204		—		95,204		—
Short-term borrowings		3,306		3,306		—		3,306		—
Long-term borrowings		6,230		6,013		291		—		5,722
Loan commitments and letters of credit		129		640		—		—		640
Indemnification obligation		383		383		—		—		383

(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 June 30, 2012 was $7.4 billion or 10.2 percent.

(3)	Excluded from this table is the lease carrying amount of $1.5 billion at June 30, 2012.

The carrying amounts and estimated fair values of the Company’s financial instruments as of December 31, 2011 are as follows:


	December 31, 2011
	Carrying Amount		Estimated Fair Value (1)
	(In millions)
Financial assets:
Cash and cash equivalents	$	7,245	$	7,245
Trading account assets		1,266		1,266
Securities available for sale		24,471		24,471
Securities held to maturity		16		17
Loans held for sale		1,193		1,193
Loans (excluding leases), net of unearned income and allowance for loan losses (2), (3)		73,284		65,224
Other interest-earning assets		1,085		1,085
Derivatives, net		339		339
Financial liabilities:
Deposits		95,627		95,757
Short-term borrowings		3,067		3,067
Long-term borrowings		8,110		7,439
Loan commitments and letters of credit		117		756

(1)

(2)

(3)	Excluded from this table is the lease carrying amount of $1.6 billion at December 31, 2011.