Accounting
SEC Fines Bancorp $1.75 Million for Accounting Rules Violations
Company failed to follow applicable accounting principles for valuations of commercial real estate securities.
Aug. 24, 2022
The Securities and Exchange Commission (SEC) today announced charges against The Bancorp Inc. related to misleading disclosures, record-keeping, and internal accounting controls failures concerning the company’s valuations of certain commercial real estate securities. Bancorp has agreed to settle charges and pay a $1.75 million penalty.
According to the SEC’s order, from the first quarter of 2017 through the first quarter of 2019, Bancorp failed to comply with generally accepted accounting principles when it valued securities it obtained from the sales of commercial real estate loans that it originated and then securitized. As stated in the order, the securities that Bancorp obtained included an interest-only component, and Bancorp categorized those securities as Level 3 assets.
As a result, applicable accounting principles required that the securities be measured at fair value and that any unobservable inputs used in the valuations reflect the assumptions other market participants would use in valuing the assets. The order finds, however, that in valuing the securities, Bancorp used prepayment assumptions that were inconsistent with market information reasonably available to Bancorp and other market participants at the time.
The SEC’s order finds that Bancorp failed to comply with Accounting Standards Codification Topic 820 by using prepayment rate assumptions that were not sufficiently supported by reasonably available market data. Bancorp also failed to document adequate support for, or analysis of, the prepayment rate and other inputs that it used; lacked policies and procedures specific to initial valuations of the securities; and failed to make adequate disclosures about the significant unobservable inputs it used in its valuations.
The SEC order finds Bancorp violated Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Exchange Act Rules 12b-20, 13a-1, and 13a-13. Without admitting or denying the SEC’s findings, Bancorp consented to a cease-and-desist order and has agreed to pay the $1.75 million penalty.