Regions Repays TARP Dues

Regions Financial Corp. (RF - Analyst Report) became one of the latest banks to repay the bailout money it had taken from the government during the latest financial crisis. On Wednesday, the company repurchased $3.5 billion of its Series A Preferred Stock, which were issued to the U.S. Department of the Treasury as part of the company’s participation in the Troubled Asset Relief Program’s (TARP).

Regions’ repayment was financed by the proceeds from the recent $900 million common stock offering, in addition to the sum of $1.2 billion received on closing the sale of Morgan Keegan & Company Inc. to Raymond James Financial Inc. (RJF - Analyst Report). Moreover, other funds from available resources were also used for the repurchase.

In mid-March, Regions passed the stress test conducted by the Federal Reserve as part of its 2012 Capital Plan and Review (CapPR). Following the results, the company came up with the common stock offering to clear the TARP dues. However, the repayment was awaiting approval of the Federal Reserve and the Treasury Department, which the company expected after the closing of the sale of Morgan Keegan & Co. Inc. and related affiliates. Earlier this week, Regions completed this deal with Raymond James.

The U.S. government had granted a $3.5 billion worth of TARP loan to Regions during the 2007-2009 financial crisis in the form of preferred stock and warrants to help it recover from the economic downturn. Over the last three years, total dividends paid by the company on the TARP preferred stock sums up to $593 million. However, on an annual basis, the repurchase of stock eradicates the dividend payment of $175 million on these securities.

U.S. Treasury still holds warrants to buy common stock in Regions with an expiry date in 2018. The Treasury has the right to buy 48.3 million shares of Regions’ common stock for $10.88 per share.

However, due to its moderately improving earnings after the economic crisis, Regions was finding it difficult to get permission to pay back the bailout money. But, in January, Regions reported the fifth consecutive quarterly profit after incurring losses since the second quarter of 2009.

Meeting the stress test criteria signifies that Regions is comfortably positioned in terms of capital and can survive another economic downturn. In addition, after settling the TARP obligation, Regions will look forward to deploy its capital through dividend hike and share repurchase, which will further enhance investors’ confidence on the stock.

Recently, another bank- Zions Bancorporation (ZION - Analyst Report) paid 50% of its total TARP dues of $1.4 billion. Zions redeemed $700 million of its Fixed Rate Cumulative Perpetual Preferred Stock, Series D which were issued to the U.S. Department of the Treasury under the TARP Capital Purchase Program. Zions’ repayment was financed by the proceeds from the recent $300 million senior notes offering, in addition to other funds from available resources.

A total of $245 billion was handed out to the banks as bailout money. In the form of repayments, dividends, interest and other income, $263 billion has been returned as well. Still, many of the regional banks have not repaid the entire bailout money.

Till date, taxpayers have recovered approximately 81% of the total $414 billion distributed by government across all TARP programs, which amounted to $337 billion.

While the larger Wall Street banks had repaid the TARP money earlier in 2009 and 2010, many regional banks stepped back due to continued high levels of losses in their loan portfolios. In addition to that, the economy was under tremendous stress. However, the recent repayment of the TARP loan by a large number of these banks can be viewed as a sign of economic recovery.

Furthermore, the TARP loan repayment is essentially a positive for Regions. It will remove the restrictions on both financial and executives’ pay package flexibility that the company was subject to, upon being a TARP participant.

Regions currently retain a Zacks #2 rank, which translates into a short-term ‘Buy’ rating. However, considering the fundamentals, we maintain a long-term “Neutral” recommendation on the stock.