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Regions Financial Corporation (RF - Analyst Report) jumped on the bandwagon of trust preferred securities (TruPS) redemption. On Thursday, the company announced that it will redeem TruPS worth $345 million, including the 8.875% securities issued by Regions Financing Trust III. Over the last few months, major financial institutions have been redeeming TruPS, since these will no longer qualify for Tier 1 capital ratio calculations beginning 2013.

Regions stated that these preferred securities will be redeemed at $25 per trust preferred share. The redemption amount will also include accrued and unpaid distributions until the redemption date arrives. The TruPS redemption will take place on December 3, 2012. Moreover, Regions will fund the redemption amount with the proceeds of the recently completed preferred stock offering.

Regions’ decision to redeem TruPS follows the announcement of the new capital rules by the Federal Reserve in June 2012. As per the new proposal, the TruPS issued prior to May 19, 2010 would not be considered for the calculation of Tier 1 capital ratio.

Redemption of TruPS will enable Regions to further bring down its interest expenses as these securities demand higher rates compared to others. The company’s interest expenses were $147 million in the third quarter compared with $205 million in the prior-year quarter.  

Further, the redemption will lead to a reduction in Regions’ long-term borrowings, which will go a long way in improving its overall financials. As of September 30, 2012, the bank’s long-term debt stood at $6.2 billion compared with $10.1 billion as of September 30, 2011.

Similar Actions

Apart from Regions, many other banks have been actively engaged in the redemption of TruPS in the last months. Among others, TCF Financial Corporation (TCB - Analyst Report) redeemed TruPS worth $115 million, Bank of America Corporation (BAC - Analyst Report) $3.9 billion, BB&T Corporation (BBT) $3.1 billion and JPMorgan Chase & Co. (JPM - Analyst Report) $9 billion. Moreover, The Bank of New York Mellon Corporation (BK - Analyst Report) has announced the redemption of TruPS worth $550 million.

Conclusion

TruPS redemption is viewed as a positive step for the banks, enabling them to bring down interest expenses, as these securities demand higher rates than other securities and often the banks replace TruPS with equity or other low-cost debt. Further, according to the Dodd-Frank Act, banks will no longer be able to consider these securities as regulatory capital beginning 2013.

Currently, shares of Regions maintain a Zacks #3 Rank, which translates into a short-term Hold recommendation.

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