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Jonathan J. Smith

Regions Financial Corporation (NYSE: RF) is a bank holding company that operates throughout the South and Midwest. Regions competes against other Southern-based banks like SunTrust Banks (STI) and BB&T (BBT), as well as larger, national banks such as Bank of America (BAC). Although its competitors have rebounded, RF is still suffering from the 2008 Financial Crisis.

Like its competitors, RF was hit hard by the 2007 Credit Crunch and the 2008 Financial Crisis, as the bank lost $5.6 billion in 2008. Regions received a capital injection from the US government via the Troubled Assets Relief Program (TARP) of $3.5 billion in capital. The TARP funding did cause RF to partake in the stress tests, which results showed that the bank could lose $9.2 billion in loans in the next two years. Unlike its non-regional, larger competitors, being a regional bank has handicapped RF to raise capital organically -- without the help of outside investors. RF has even considered divesting its Morgan Keegan investment business, which has been the top brokerage in the past five years.^[1] On top of RF's struggling portfolio, the bank has also had legal troubles made public on July 21st, 2009. Regions was sued by the SEC for not disclosing information to their clients and has a class action suit for charging hidden fees at their ATMs.

Company Overview

As a bank holding company, Regions makes money using corporate banking products such as investment banking as well as retail banking products such as ATM fees. Regions has more than 1,900 banking offices and 2,400 ATM locations. Regions is classified as a regional bank -- a bank that is prevalent in one geographic area, but lacks market share in other geographic locations. Regions is mainly located in the South; 51% of its branches are located in Alabama, Florida, and Tennessee.^[2]Regions Financial is the 12th largest bank in the U.S. by assets.^[3] Being a regional bank, RF competes with larger, national banks as well as other regional banks in the Southeast for clients. RF has a 20.7% market share in the Southeast.^[4]

Business Financials

The 2008 Financial Crisis exposed RF's risky loan portfolio. RF had a $0.28/share loss in Q2 2009, primarily due to the bank accounting $912 million for credit losses.^[4] The bank is still struggling to rid its risky loans, as RF's non-performing assets increased 60% to $977 million in Q2 2009.^[5] In a March 2009 comparision, RF's Tier 1 Capital Ratio% of 10.37% ranked 10th amongst the 13 largest U.S. banks.^[6] A bank's Tier 1 Capital Ratio% is used as a financial barometer for the bank's stability, as it was used in the bank stress tests.

Unfortunately for RF, on August 13th, 2009, Bloomberg's Jonathan Weil noticed a $22.8 billion discrepancy in RF's quarterly report.^[7] RF claimed that the carrying value of their loans was $90.9 billion, but had an estimated fair value of $68.1 billion.^[8] This bookkeeping discrepancy could halt RF's crisis recovery progress.

• RF has had to make severe portfolio adjustments to recover from the 2008 Financial Crisis. The bank's Loan Loss Provision, debt set aside for bad loans, increased in 2008 almost four-times the 2007 value. To prevent further damage from market stress, RF has increased its Tier 1 Capital Ratio%, a standard measure of the "health" of a bank, to over 12%.

Business Segments

General Banking/Treasury ($5.6 Billion Loss in FY2008)

The General Banking segment provides commercial, retail, and mortgage banking products. RF's banking subsidiary, Regions Bank, is centered in Alabama and has other locations in the South and Midwest United States. From FY2007 to FY2008, the General Banking segment lost $7.04 billion due to holding toxic assets, such as Mortgage-Backed Securities (MBS).^[10]

Investment Banking, Brokerage, and Trust ($128 Million Net Income in FY2008)

The Investment Banking segment provides brokerage and trust products, including asset management and fixed income and equity capital markets. MSN Money considers Regions Financial's Morgan Keegan brand as one of the top equity research firms in the past seven years.^[11] According to The Financial Times, four of Morgan Keegan's analysts are ranked #1 in their respective industries.^[11] In addition, Morgan Keegan analysts have been featured in the Wall Street Journal's Best on the Street survey in 13 of the past 15 years.^[12] Despite the groups accolades, the Investment Banking segment net income decreased 22.6% from FY2007 to FY2008 due to harsh conditions in capital markets.^[10]

Insurance ($20.1 Million Net Income in FY2008)

The Insurance segment provides health, casualty, property, life, and accident insurance. In FY2008, RF's insurance business was ranked 7th in the U.S. by income -- an improvement from its 9th place finish in FY2007.^[13] The segment offers other insurance products such as credit life, environmental,crop, and mortgage insurance.^[10] From FY2007 to FY2008, the Insurance segment net income increased 12.8%.^[10]

RF's loan portfolio has prevented the bank to fully recover from the financial crisis, as the bank has gained $350 million in non-performing loans in 2009.

Trends and Forces

Even After Receiving TARP Funding, Regions Financial is Still Struggling from 2008 Financial Crisis.

To repair losses from the 2008 Financial Crisis, RF was given $3.5 billion in TARP funding to help cover its $5.6 billion loss in 2008.^[14] After receiving the TARP funding, RF was one of 10 banks required to raise capital from the stress tests.^[15] Results from the stress test showed that RF might incur $9.2 billion in loan losses in the next two years,^[14] and that the bank would have to raise $2.5 billion to avoid becoming nationalized.^[16] This disadvantage was apparent during the stress tests, as RF was not big enough to raise capital without selling shares or assets.^[15] In comparison, larger Money Center Banks can raise capital from outside investors due to having a stronger network and investor report. Being a smaller, regional bank is one reason RF is still struggling after the crisis.

After the stress test results, Regions is also trying to remove risky assets from its portfolio. RF was not able to hedge it's Mortgage-Backed Securities (MBS) risk, such as residential homebuilder loans, Florida home equity loans and condominium loans.^[15] These loans have hurt RF the most, as commercial real estate prices have dropped 30% since 2007.^[17] At the end of Q109, RF held $36.8 billion in commercial real estate and construction loans -- 38% of the bank's overall loan portfolio.^[17] 17% of their loans ($610 million) were considered non-performing -- otherwise known as toxic assets. At the end of Q2 2009, the bank's loan portfolio had accumulated even more toxic assets, as non-performing assets increased 60% to $977 million.^[5]

Legal Troubles Pressure RF's Finances and Public Relations.

In July 2009, RF has been under public scrutiny for unlawfully holding information from its clients. When risk in auction rate securities surged in early 2008, Regions failed to make their clients aware that markets would become illiquid in the future,and the bank told brokers to accelerate selling until the ARS market froze in February 2008. As a result of their actions, the bank's clients lost a combined $1.2 billion.^[18] The Securities and Exchange Commission (SEC) is suing RF to pay back its clients and pay an additional fine. Since the lawsuit, RF has repurchased $56 million of the ARS from customers.^[18] In addition to the SEC case, RF is under investigation for charging a $3 hidden fee to non-clients at ATMs.^[19] The lawsuits has come at a bad time for Regions, who is still struggling to clean its Mortgage-Backed Securities (MBS) portfolio.

RF Open to Divest Renowned Morgan Keegan Business

To repay TARP funds, Morgan Keegan is open to selling its share of brokerage Morgan Keegan.^[11] Morgan Keegan has historically been a profitable group for Regions, as it had five straight years of record revenues and earnings from 2002 - 2006.^[1] Despite a 22.6% decline in net income from 2007 to 2008, Morgan Keegan had the most profitable recommended stock list amongst 14 other brokerage firms from 2004 to 2008, with 13.09% returns.^[1] Regions still owes $3.5 billion for TARP and is projected to lose $9.2 billion in the next two years.^[20] RF would be able to pay back TARP loans by divesting part of Morgan Keegan, and would have capital to reduce its toxic loan losses.

Competition

In the Banking sector, Regions Financial will have to continue playing catch-up from it's billion-dollar losses in 2008. RF's competitors, including large investment banks and retail banks, were not hit as hard as RF and have generally recovered from the crisis. The bank concentrates its efforts in the Southeast, where it has 20.7% market share in that region.^[4]

• SunTrust Banks (STI) -- STI offers similar banking products as RF and is also based in the Southeastern U.S.^[21] Despite not losing as much money as RF in Q4 2008, STI received $1.4 billion more in TARP funding.
• Bank of America (BAC) -- BAC is a larger national bank that competes with RF for new banking clients.^[22]
• BB&T (BBT) -- Like STI, BBT offers similar banking products and is located in the Southeastern U.S.^[23] Compared to RF, BBT is more efficient profit-wise, as it has a high net profit margin of 20.43%.

References

1. ↑ ^{1.0 1.1 1.2} Morgan Keegan Website, History, "2000-2009"
2. ↑ RF 2008 10-k, Item 1: Business, page 2
3. ↑ Money Morning, "The Top 12 U.S. Banks: From Zombies to Hidden Gems"
4. ↑ ^{4.0 4.1 4.2} Regions Financial website, "Strength and Stability Facts"
5. ↑ ^{5.0 5.1} Financial Times, "Quarterly loss for Regions Financial," 07/22/09
6. ↑ Seeking Alpha, "Tier 1 Capital Ratios of Large U.S. Banks," 06/21/09
7. ↑ Bloomberg, "Next Bubble to Burst Is Banks’ Big Loan Values," 08/13/09
8. ↑ Seeking Alpha, "Regions Financial: Sitting on a $22.8 Billion Sinkhole?" 08/14/09
9. ↑ RF Q3 2009 10-Q,Table 12: "Regulatory Capital Requirements," page 61
10. ↑ ^{10.0 10.1 10.2 10.3} RF 2008 10-k, Note 24: Business Segment Information, page 148
11. ↑ ^{11.0 11.1 11.2} MSN Money, "Morgan Keegan Equity Research Analysts Ranked among the Nation’s Best," 05/15/09
12. ↑ Morgan Keegan website, "Best on the Street"
13. ↑ Seeking Alpha, "Ranking U.S. Banks by Insurance Income," 07/19/09
14. ↑ ^{14.0 14.1} Hot Stocked, "Regions Financial Corporation (NYSE: RF) Struggles to Leave TARP," 06/10/09
15. ↑ ^{15.0 15.1 15.2} Reuters, "Regions Financial posts Q2 loss on bad loans," 07/21/09
16. ↑ Reuters, "U.S. Banks Rush to Raise Capital," 05/08/09
17. ↑ ^{17.0 17.1} Bloomberg, "Regions, KeyCorp Face Losses From Commercial Property Defaults," 07/20/09
18. ↑ ^{18.0 18.1} Bloomberg, "Regions’ Morgan Keegan Sued Over Auction-Rate Bonds," 07/21/09
19. ↑ The Birmingham News, "Suit Says Regions Fails to Disclose ATM Fees," 07/27/09
20. ↑ Hot Stocked, "Regions Financial Corporation Struggles to Leave TARP," 06/10/09
21. ↑ SunTrust Banks website, "About SunTrust"
22. ↑ Bank of America website, "About Bank of America"
23. ↑ BB&T website, "About BB&T"
24. ↑ RF 2008 10-k, Item 6: Selected Financial Data, page 24
25. ↑ Reuters, STI Income Statement
26. ↑ Reuters, RF
27. ↑ Reuters, BBT
28. ↑ Reuters, BAC