REGIONS FINANCIAL CORP

INCOME TAXES

The components of income tax expense from continuing operations for the years ended December 31 were as follows:



	2017		2016		2015
	(In millions)
Current income tax expense:
Federal	$	376	$	444	$	293
State	30		21		7
Total current expense	$	406	$	465	$	300
Deferred income tax expense:
Federal	$	172	$	2	$	115
State	36		47		40
Total deferred expense	$	208	$	49	$	155
Total income tax expense	$	614	$	514	$	455

__________

Note: The table above does not include total income tax expense (benefit) from discontinued operations of $2 million, $3 million, and $(9) million in 2017, 2016 and 2015, respectively. The deferred income tax expense reflected in discontinued operations was $1 million, $18 million and $46 million in 2017, 2016 and 2015, respectively.

On December 22, 2017, Tax Reform was enacted. Effective January 1, 2018, Tax Reform reduces the maximum corporate statutory federal income tax rate from 35 percent to 21 percent. As a result of enactment, the Company recognized additional income tax expense of approximately $52 million in the fourth quarter of 2017, which included $25 million related to revaluation of its net deferred tax assets, $23 million related to the revision of its proportional amortization calculation associated with low-income housing investments, and $4 million related to revaluation of the reserve for unrecognized tax benefits. The revaluation included a $133 million decrease in the net deferred tax assets related to unrealized gains and losses included in stockholders' equity. The amounts discussed above related to Tax Reform represent estimates based upon the information available at December 31, 2017. As a result, the amounts could be adjusted during the measurement period, which will end in December 2018. Any such changes are not expected to be material to the Company's business, financial position, results of operations or cash flows.

The Company adopted new accounting guidance effective December 31, 2017 that allows reclassification of the $133 million revaluation amount, which decreased accumulated other comprehensive income and increased retained earnings. Refer to Note 1 for additional information on the new accounting guidance.

With the exception of the revaluation adjustment related to unrealized gains and losses included in stockholders' equity, income tax expense does not reflect the tax effects of unrealized losses on securities transferred to held to maturity, unrealized gains and losses on securities available for sale, unrealized gains and losses on derivative instruments and the net change from defined benefit pension plans and other postretirement benefits. Furthermore, following Tax Reform enactment, the income tax effects included in other comprehensive income were based on the newly enacted federal income tax rate including the effect of state income taxes. Refer to Note 15 for additional information on stockholders’ equity and accumulated other comprehensive income (loss).

The Company accounts for investment tax credits using the deferral method. Investment tax credits generated totaled $102 million, $54 million and zero for 2017, 2016 and 2015, 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:



	2017			2016			2015
	(Dollars in millions)
Tax on income from continuing operations computed at statutory federal income tax rate	$	655		$	585		$	535
Increase (decrease) in taxes resulting from:
State income tax, net of federal tax effect	43			44			30
Tax-exempt interest	(54		)	(49		)	(44		)
Affordable housing investment amortization, net of tax benefits (excluding Tax Reform)	(52		)	(50		)	(47		)
Impact of Tax Reform	52			—			—
Bank-owned life insurance	(32		)	(37		)	(30		)
Lease financing	16			28			18
Other, net	(14		)	(7		)	(7		)
Income tax expense	$	614		$	514		$	455
Effective tax rate	32.8		%	30.7		%	29.7		%

__________

Note: Income tax expense includes amortization of affordable housing investments of $160 million (including $23 million due to impact of Tax Reform), $117 million and $103 million for 2017, 2016 and 2015, respectively. Income tax expense for 2015 includes a benefit of $15 million related to an improved methodology implemented to estimate the effective state tax rate.

Significant components of the Company’s net deferred tax asset at December 31 are listed below:



	2017			2016
	(In millions)
Deferred tax assets:
Unrealized gains and losses included in stockholders’ equity	$	253		$	338
Allowance for loan losses	249			447
State net operating loss carryfowards, net of federal tax effect	82			88
Accrued expenses	55			92
Federal tax credit carryforwards	13			13
Fixed assets	4			—
Employee benefits and deferred compensation	—			37
Other	33			59
Total deferred tax assets	689			1,074
Less: valuation allowance	(34		)	(30		)
Total deferred tax assets less valuation allowance	655			1,044
Deferred tax liabilities:
Lease financing	292			424
Goodwill and intangibles	99			156
Mortgage servicing rights	63			93
Fixed assets	—			15
Other	38			48
Total deferred tax liabilities	492			736
Net deferred tax asset	$	163		$	308

The following table provides details of the Company’s tax carryforwards at December 31, 2017, including the expiration dates, any related valuation allowance and the amount of taxable earnings necessary to fully realize each net deferred tax asset balance:



	Expiration Dates	Deferred Tax Asset Balance		Valuation Allowance			Net Deferred Tax Asset Balance		Pre-Tax Earnings Necessary to Realize ⁽¹⁾
	(In millions)
Alternate minimum tax credits-federal	None ⁽²⁾	$	13	$	—		$	13	$ N/A
Net operating losses-states	2018-2022	42		(9		)	33		553
Net operating losses-states	2023-2029	33		(21		)	12		240
Net operating losses-states	2030-2037	7		(4		)	3		44
Other credits-states	2018-2022	—		—			—		N/A
Other credits-states	2023-2029	1		—			1		N/A

________

(1) N/A indicates that credits are not measured on a pre-tax basis.

(2) Tax Reform repealed the AMT for tax years beginning after December 31, 2017 and provides a mechanism to utilize any AMT credit carryover through 2020 with any remaining credits being fully refundable in 2021.

Of the $163 million net deferred tax asset, $62 million relates to net operating losses and tax credit carryforwards, $46 million of which expires before 2030 (as detailed in the table above). The remaining $101 million of net deferred tax assets do not have a set expiration date at December 31, 2017.

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. At December 31, 2017, positive evidence supporting the realization of the deferred tax assets includes a history of positive earnings with no history of significant tax credit carryforwards expiring unused. In addition, the reversal of taxable temporary differences, excluding goodwill and the inclusion of the accretion of taxable temporary differences related to leveraged leases acquired in a previous business combination, will offset approximately $430 million of the gross deferred tax asset.

The Company believes that a portion of the state net operating loss carryforwards and state tax credit carryforwards will not be realized due to the length of certain state carryforward periods. Accordingly, a valuation allowance has been established in the amount of $34 million against such benefits at December 31, 2017 compared to $30 million at December 31, 2016. The valuation allowance increased during 2017 by $6 million as part of the $52 million increase to tax expense related to Tax Reform. The increase was partially offset by decreases related to certain state net operating losses and state tax credits.

A reconciliation of the beginning and ending amount of unrecognized tax benefits (“UTBs”) is as follows:



	2017			2016			2015
	(In millions)
Balance at beginning of year	$	31		$	38		$	50
Additions based on tax positions related to the current year	—			3			2
Reductions based on tax positions taken in a prior period	—			(6		)	(8		)
Settlements	—			(3		)	(6		)
Expiration of statute of limitations	(4		)	(1		)	—
Balance at end of year	$	27		$	31		$	38

The Company files U.S. federal, state, and local income tax returns. The Company’s federal income tax returns are no longer subject to examination by the IRS for taxable years prior to 2013. In 2015, the Company entered the IRS’s Compliance Assurance Process program and is currently under examination for 2016, 2017 and 2018. The 2015 examination has been closed without adjustment. With few exceptions, the Company is no longer subject to state and local income tax examinations for tax years before 2010. Currently, there are disputed tax positions 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 certain federal and state income tax positions, it is reasonably possible that the UTBs could decrease as much as $24 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, 2017, 2016 and 2015, the balance of the Company’s UTBs that would reduce the effective tax rate, if recognized, was $21 million, $20 million and $24 million, respectively. The remainder of the UTB balance has indirect tax benefits in other jurisdictions or is the tax effect of temporary differences.

Income tax expense for 2017, 2016 and 2015, includes a total expense (benefit) of $(2) million, $1 million and $(1) million, respectively, for interest expense, interest income and penalties before the impact of any applicable federal and state deductions. As of December 31, 2017 and 2016, the Company had a liability of $2 million and $4 million, respectively, for interest and penalties related to income taxes, before the impact of any applicable federal and state deductions.