Regions Bank – Mississippi’s market leader — won’t be making a big payment to the Troubled Asset Relief Program, or TARP, with the $1.18 billion it is to gain through the pending sale of the Morgan Keegan investment brokerage.
But the liquidity that the Birmingham bank’s holding company, Regions Financial, will gain from the sale of Morgan Keegan to Raymond James will help the holding company begin whittling down the $3.4 billion still owed the U.S. Treasury under TARP, bank executives say.
With money from the Morgan Keegan sale, which includes a $930 million payment and a $250 million dividend payment from Morgan Keegan, Regions Financial will reach around $4 billion in liquidity. The new cash will help Regions on both the TARP front and in its capital ratio, said David Turner, Regions Financial CFO, in remarks to investors and analysts following the announcement of the Morgan Keegan sale.
“Those are so closely linked, we think honestly there’s some expectation that there would be… increases in capital required that would address both liquidity, as well as capital, relative to the TARP repayment” Turner said. “So I think you’ve really got to look at both of those needs.”
Zacks Equity Research reported Jan. 12 that Regions has yet to receive regulatory approval to begin repaying its TARP debt.
In the meantime, Regions has been paying the Treasury a dividend of 5 percent on the preferred shares it awarded Treasury in exchange for the TARP money, said spokeswoman Evelyn Mitchell.
Regions said money from the Morgan Keegan sale is expected to boost its Tier 1 regulatory Capital and Tier 1 Common (non-GAAP) ratios by about 13 basis points and 9 basis points, respectively. Each basis point totals1/100th of a percent.
In its year-end earnings report, the $127 billion Regions reported Tier 1 and Tier 1 common1 capital ratios at an estimated 13.2 percent and 8.5 percent, respectively, and on a Basel III basis1 were estimated to be 7.7 percent and 11.3 percent, above the respective 7 percent and 8.5 percent minimum requirements.
The extra liquidity and the removal of the troubled Morgan Keegan asset, “lowers the overall risk profile of the company going forward,” CEO Grayson Hall said in remarks to investors.
Regions began shopping Morgan Keegan after paying slightly more than $200 million to settle claims brought by Mississippi and several other states that Morgan Keegan investment brokers misled investors in subprime-mortgage backed securities. Regions says it will retain liability for all claims that occur before the sale to Raymond James closes sometime in the first quarter.
Regions says the sale does not include Morgan Asset Management and Regions Morgan Keegan Trust. They will remain part of Regions’ Wealth Management organization.
In making the sale, Regions projects an impairment charge in the range of $575 million to $745 million (non-deductible) in the fourth quarter of 2011, which would be associated with a $731 million goodwill impairment charge related to its Investment Banking/Brokerage/Trust segment.
This impairment charge included $478 million related to discontinued operations and $253 million from continuing operations.
The impairment charge contributed to a fourth quarter loss of 11 cents per diluted share.
Analysts say putting the impairment charge behind it gives Regions a clean slate for the new year and should help its share price continue a climb that reached 33 percent in the fourth quarter.
Investment research firm Zacks says regulatory issues remain a major area of concern for Regions but also notes Regions’ favorable funding mix, improved core business performance, its expansion mode and strategies will continue to yield profitable earnings in the upcoming quarters.