Regions Settles 2009 Loan Accounting Issue for $51M - Analyst Blog

On Wednesday, Regions Financial Corporation RF entered into a deferred prosecution agreement with the Securities and Exchange Commission (SEC) for cooperation with the investigation and settlement of federal and state allegations for $51 million. Notably, the Alabama-based lender will pay a fine worth $46 million to the Federal Reserve, while $5 million will be paid to the Alabama Department of Banking.

Regulators alleged that Regions was responsible for misappropriate accounting of bad commercial loans worth $168 million, which increased the bank's income in the financial reports, thereby showing inflated earnings. The settlement agreement entails the resolution of regulatory inquiry over Regions' accounting issues with certain problem loans at the end of first-quarter 2009. Notably, as disclosed earlier, the company put aside a sufficient amount as reserve in the fourth quarter of 2013 to settle this matter.

Moreover, the deferred prosecution agreement was entered with the SEC on Regions' failure to sustain adequate controls over its accounting, which led to securities laws violations in 2009. As per the terms, the bank will not be indicted if it abstains from such violations and meets other conditions for a 2-year period ending Jul 2016.

The Fed and the SEC levied civil penalty against 3 former managers at the company's Regions Bank unit. According to the SEC, in the first quarter of 2009, these executives intentionally evaded Regions' internal accounting controls and inappropriately classified troubled commercial loans worth $168 million as performing. Allegedly, the move was taken to reserve less money for loan and lease losses, thereby inflating earnings per share.

Regions Bank's head of special assets – Jeffrey Kuehr and former chief credit officer – Michael Willoughby would be paying $70,000 each as civil penalty, besides facing a 5-year ban from acting as officers or directors of any public company. Though Kuehr and Willoughby neither denied nor admitted any wrongdoings, they agreed to abstain from securities laws violations in the future.

Notably, the case filed by the SEC will be continued against the former head of the bank's risk analytics group – Thomas Neely – who has claimed the charges to be baseless and will fight the case.

Such regulatory issues alleging banks of wrongdoings tarnish their reputation and financials over time. With the settlement of the same, Regions plan to move forward with the business strategies, after attempting to end issues related to the financial crisis.

The company has returned to sustainable profitability since the financial crisis. We believe favorable funding mix, improved core business performance, expansion spree, and other strategic initiatives will yield profitable earnings in the coming quarters.

Currently, Regions carries a Zacks Rank # 3 (Hold). Some better-ranked Southeast banks include Capital City Bank Group Inc. CCBG, Middleburg Financial Corporation MBRG and Midsouth Bancorp Inc. MSL. All 3 carry a Zacks Rank #1 (Strong Buy).