RF Regions Financial Corporation

Yesterday, Regions Financial Corp. (RF) announced the merger of its three units into a single wealth management group.  The company reorganized its businesses following the plan of selling off its scandal-hit brokerage unit Morgan Keegan.

Alabama-based Regions pooled its trust, insurance and private banking units into one group, which would look after affluent clients. The combined unit will help in gaining profitable customers, which in turn, will raise fee income.

The new business line will facilitate Regions in advancing its strategic plan by focusing on the main and profitable customer segment.  The company aims at increasing non-interest revenues and creating strong customer relationships while providing greater value to them.

Morgan Keegan's trust unit recorded $56 million in gross revenues in the first quarter of 2011, which is about 17% of Morgan Keegan's total gross revenue. Further, results of the private banking unit are not separately shown by Regions and the insurance unit posted a first-quarter profit of $7 million.

Approximately 1,900 employees will move to the new unit, with more than 1,000 coming from Morgan Keegan's trust business. The company's trust unit operates 60 offices in 16 states. The remaining new group will include 320 private bank employees and 600 insurance unit employees.

Bill Ritter, who served as a senior executive vice president and Central Region president, will lead the new wealth management group. In addition, John M. Turner Jr., former president of Whitney National Bank, who has considerable industry experience, has also joined the company as Central Region president.  Both of them will report to Regions President and CEO Grayson Hall and will serve on the company’s Operating Committee.

Regions is contemplating strategic options for the part-sale of its Morgan Keegan & Co. brokerage unit as it came under the Securities and Exchange Commission’s (SEC) investigation. The company does not plan to sell Morgan Keegan's asset management and trust businesses. Regions has hired Goldman Sachs Group Inc. (GS) to explore alternatives for its Morgan Keegan unit.

Regions’ subsidiaries Morgan Keegan & Co. and Morgan Asset Management have agreed to pay $200 million to settle fraud charges related to subprime mortgage-backed securities. They were involved in fraudulent marketing of mutual funds.

The SEC accused Regions' subsidiaries of fraud related to the sale of proprietary Regions Morgan Keegan (RMK) Bond Funds. Memphis, Tennessee-based Morgan Keegan, a brokerage arm of Regions, as well as former portfolio manager James C. Kelsoe Jr. and comptroller Joseph Thompson Weller were all accused in the administrative proceedings held in 2010. They were accused of misrepresenting subprime mortgage-backed securities in five funds and also manipulating prices managed by Morgan Asset Management from January 2007 to July 2007.

The investors suffered significant losses due to their investments in this product when the housing market collapsed. As part of its settlement, Regions also consented to improve its reviews and approval of its mortgage securities transactions. It is estimated by regulators that over 30,000 investors lost over $1.5 billion in the seven RMK branded bond funds.

Earlier this week, JPMorgan Chase & Co.’s (JPM) U.S. broker-dealer affiliate, J.P. Morgan Securities LLC, agreed to pay $153.6 million to settle charges with the SEC. The SEC had alleged that the bank misled investors in a synthetic collateralized debt obligation (CDO) known as Squared CDO 2007-1 that was tied to the U.S. housing market.

Since 2007, Regions has been posting annual losses though recorded profits in the last two quarters, and is yet to receive regulatory approval to repay $3.5 billion of government bailout money. According to The Wall Street Journal, Regions is putting Morgan Keegan on the block to raise capital and repay the federal government.

While such charges will dent Regions’ reputation and financials, this will be a relief for investors, who have lost their hard-earned money in such investments. Moreover, after the settlement, Regions will be able to explore opportunities consistent with its strategic and capital planning initiatives. Moreover, the formation of a new group will aid in diversifying revenue streams.

Regions currently retain a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Moreover, considering the fundamentals, we maintain a “Neutral” recommendation on the stock.

 
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