Regions Bank 2011 Annual Report Download - page 131

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
(In millions)
+200 basis points ........................ $300
+100 basis points ........................ 173
-50 basis points ......................... (111)
Instantaneous Change in Interest Rates
+200 basis points ........................ $364
+100 basis points ........................ 222
-50 basis points ......................... (141)
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