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Regions becomes acquisition target after failing stress test
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Regions Financial Corp. is feeling the stress.
Not only did the Birmingham, Ala., bank fail the U.S. Treasury Department's stress test, it's still trying to shed bad loans and handle lingering problems with its brokerage unit.
After a staggering $6.24 billion loss in the fourth quarter of 2008, the company returned to profit in the first quarter of this year, earning $26 million, or 4 cents a share. But that's still below year-ago earnings of $337 million, or 48 cents a share.
After failing the Treasury test, Regions put $1.85 billion in common and preferred shares for sale toward the Fed's mandate to raise $2.5 billion in cash.
Jeff Davis, an analyst with Howe Barnes Hoefer & Arnett in Chicago, said the sale had the desired affect; Regions refortified its capital position. For investors, however, the 85 percent increase in share count leaves the stock heavily diluted.
"Regions is going to make it," he said. "But it came at a great cost to shareholders."
The bad loans and "toxic assets" aren't helping. Regions first-quarter set aside for loan loss provisions was $425 million. That's down from $1.2 billion from the fourth quarter but still well above $181 million a year ago.
The bank identified residential homebuilding, home-equity second liens, especially in Florida's embattled real estate market, and condominiums as the biggest problems. Those assets accounted for about 9 percent of Regions' total loan portfolio, though the bank created a division last fall to sell off the troubled real estate loans.
"The street's question is: how bad does the other 90 percent become infected," Davis said. "If it's not that bad, the stock may work OK, particularly if the asset quality stabilizes in the next couple of quarters."
But the mortgage meltdown is rippling through Regions' investment arm, as well. Morgan Keegan has been paying off a string of arbitrated settlements after some of its bond funds tied to risky mortgage-backed securities lost $2 billion in the meltdown.
The Financial Industry Regulatory Authority, the agency overseeing arbitration of fund investors' claims, has ordered Morgan Keegan to pay a reported $2.4 million so far with hundreds more claims to go.
Regions is frequently mentioned as an acquisition target. In recent months, the bank has even acknowledged the leading candidates are BB&T Corp., a financial holding company based in North Carolina, and JPMorgan Chase, which has said it would like to expand in the Southeast.
Davis, however, sees the chances of a Regions takeover cooling, at least in the near term.
"They avoided making money by selling when times were good," he said. "Then the issue is compounded by a massive dilutive share issue at a very low price."
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