On September 20, 2019, The Bancorp, Inc. (“Bancorp”), a Delaware bank holding company, agreed to pay a $1.4 million civil penalty to settle an SEC enforcement action alleging violations of the reporting, books and records, and internal controls provisions of the Exchange Act and the rules thereunder based on accounting failures related to the company’s allowance for loan and lease losses (“ALLL”) and its provision for loan and lease losses (“PLLL”). Bancorp’s chief credit officer, Donald McGraw, Jr., and former chief risk officer, James David Hilty, were charged with causing certain of Bancorp’s violations. The SEC alleged that Bancorp failed to properly classify certain loans and failed to take charges in appropriate periods for individually impaired loans, as reflected by its decision in April 2015 to restate its previously issued financial statements for fiscal years 2012 and 2013 and for the first three quarters of 2014.2 The restatement resulted in an aggregate adjustment to Bancorp’s PLLL of approximately $138.6 million. McGraw and Hilty each agreed to pay $50,000 to settle the SEC’s charges.

As reported in a previous issue of the Round-Up, in December 2017, Bancorp’s auditor, Grant Thornton, agreed to a $1.5 million settlement with the PCAOB as a result of its alleged failure to obtain sufficient audit evidence concerning the reported value of Bancorp’s net loans, the effectiveness of ALLL-related controls, and the reasonableness of Bancorp’s ALLL estimates.

• Failure to Properly Identify Distressed Loans – According to the SEC’s order, Bancorp “relied too heavily on borrowers’ and guarantors’ reputations,” failed to downgrade risk ratings in its portfolio when confronted with negative information, and repeatedly extended more credit to delinquent borrowers. Bancorp’s ALLL and PLLL accounts were driven by a risk-weighted assessment of the loan portfolio, in which individual loans were assigned a score of 1-8. Because Bancorp failed to identify the distressed borrowers, it had underweighted the attendant risks and therefore materially understated its PLLL from 2010 to 2013 and ALLL from 2010 to 2014.
• Identifying Troubled Debt Restructuring – As part of its internal controls over financial reporting, Bancorp had a committee of employees that were charged with identifying troubled debt restructuring (“TDR”) loans. However, according to the SEC’s order, from at least March 2012 to October 2013, the company failed to properly identify loans as TDRs, including a $44 million relationship in which the guarantor had a criminal conviction. These failures resulted in a significant deficiency in internal controls, which Bancorp reported multiple times to its audit committee.
• Individual Accountability – The SEC alleged that Bancorp’s chief credit officer McGraw had ultimate responsibility for maintaining appropriate and current credit files. The order states that McGraw, among other things, failed to ensure that the credit files contained timely appraisals and negative information concerning borrowers and guarantors, and also failed to include references to delinquencies in credit requests. The SEC’s order further states that Hilty, while serving as Bancorp’s chief risk officer, caused the company’s violations by using risk ratings and impairment decisions that he knew or should have known were not fair and accurate to estimate Bancorp’s ALLL and PLLL.

The SEC’s settlement order with Bancorp can be found here.

The SEC’s settlement order with McGraw can be found here.

The SEC’s settlement order with Hilty can be found here.

View the full Accounting & Financial Reporting Enforcement Round-Up.