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.