CONFIDENTIAL TREATMENT REQUESTED PURSUANT TO 17 C.F.R. § 200.83
WELLS SUBMISSION ON BEHALF OF BELMONT RIDGE BANK NATIONAL ASSOCIATION
Investigation File No. HO-14287 Formal Order No. EN-2023-0947
Submitted to:
Gregory Bonham Assistant Director, Financial Fraud Unit Division of Enforcement U.S. Securities and Exchange Commission
Renata Moss Branch Chief Division of Enforcement U.S. Securities and Exchange Commission
100 F Street NE Washington, D.C. 20549
Submitted by:
CALDERWOOD & HARKNESS LLP 425 Lexington Avenue, 30th Floor New York, NY 10017
Victoria Chambers, Partner Jasmine Thornton, Lead Associate
On Behalf of:
BELMONT RIDGE BANK NATIONAL ASSOCIATION 200 Park Avenue South, 38th Floor New York, NY 10003 Nasdaq: BRDG OCC Charter No. 24891
April 5, 2024
CONFIDENTIAL TREATMENT REQUESTED PURSUANT TO 17 C.F.R. § 200.83
This submission contains confidential commercial, financial, and proprietary information. Belmont Ridge Bank National Association respectfully requests that this submission and its exhibits be accorded confidential treatment in their entirety pursuant to 17 C.F.R. § 200.83 and not be made part of the public record.
42 Pages Plus Exhibits A Through G
I. PRELIMINARY STATEMENT
Calderwood & Harkness LLP represents Belmont Ridge Bank National Association ("BRB" or the "Bank") in connection with the above-referenced investigation, File No. HO-14287, conducted pursuant to Formal Order of Investigation No. EN-2023-0947. BRB respectfully submits this Wells Submission in response to the notification the Bank received on March 8, 2024 from Branch Chief Renata Moss and Assistant Director Gregory Bonham that the Staff of the Division of Enforcement (the "Staff") is considering recommending that the Commission bring an enforcement action against BRB.
During the March 8 Wells call, the Staff indicated that it may recommend charges under Sections 13(a) and 13(b)(2)(A) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78m(a), 78m(b)(2)(A), and Rules 13a-1 and 12b-20 thereunder, 17 C.F.R. §§ 240.13a-1, 240.12b-20. Specifically, the Staff's potential recommendation is premised on the allegation that BRB's Annual Report on Form 10-K for fiscal year 2022 (filed February 28, 2023) and its Quarterly Reports on Form 10-Q for the first quarter of 2023 (filed May 10, 2023) and the second quarter of 2023 (filed August 9, 2023) materially understated expected credit losses in the allowance for credit losses ("ACL") for BRB's BridgeFin digital lending portfolio. In the Staff's preliminary view, this understatement resulted from BRB's treatment of certain re-aged and modified loans within its Current Expected Credit Loss ("CECL") model, pursuant to which the Bank reclassified modified loans to current status for purposes of delinquency bucketing, thereby reducing the loss-rate inputs to the Bank's vintage-cohort loss-rate methodology.
BRB submits this Wells Submission to demonstrate that the Staff's potential recommendation is unwarranted and should not go forward. In summary, BRB respectfully submits that the following four independent grounds, each addressed in detail below, counsel decisively against the initiation of an enforcement proceeding:
First, BRB's CECL methodology was reasonable and within the range of acceptable estimates under ASC 326. The Bank's vintage-cohort loss-rate approach is one of the methodologies explicitly contemplated by ASC 326. The model was developed by qualified risk analytics professionals, subjected to rigorous internal governance processes at multiple levels of management, reviewed and approved by the Bank's Audit Committee, and audited by BRB's independent auditor, Whitfield Keane LLP (PCAOB Registration No. 2847). Whitfield Keane issued an unqualified opinion on BRB's fiscal year 2022 financial statements, including the ACL. An independent forensic analysis by Dr. Franklin Osei, CPA, CFF of Brindoval Analytic Partners LLC confirms that BRB's methodology and resulting ACL estimate fall squarely within the range of reasonable estimates under the standard. The Staff's alternative estimate of $180.8 million, while a permissible outcome under the standard, does not render BRB's estimate of $143.5 million unreasonable. The two figures represent different points on a continuum of legitimate accounting judgment.
Second, BRB's treatment of re-aged and modified loans was consistent with guidance issued by the Office of the Comptroller of the Currency ("OCC"), the Bank's primary federal regulator, and was appropriately disclosed in the filings at issue. BRB applied its re-aging treatment only where borrowers met specific re-performance criteria documented in the BridgeFin loan modification program policies. The OCC's concurrent supervisory assessment of BRB found no material deficiency in the Bank's ACL methodology, and BRB has continuously maintained a CAMELS composite rating of 2 (Satisfactory) under OCC Charter No. 24891. The Staff's preferred approach—retaining modified loans in their original vintage delinquency buckets—reflects a methodological preference, not a requirement of generally accepted accounting principles ("GAAP") or regulatory guidance.
Third, the difference between BRB's reported ACL and the Staff's preliminary view represents a good-faith difference in accounting judgment, not a misstatement. The $37.3 million difference is entirely attributable to the methodological treatment of re-aged loans—not to any data error, omission, or manipulation. Although the difference marginally exceeds BRB's internal quantitative materiality threshold of $30.6 million (5% of FY 2022 pre-tax income of $612 million) by approximately $6.7 million, a holistic assessment of the qualitative factors identified in SEC Staff Accounting Bulletin No. 99 ("SAB No. 99") weighs heavily against a finding of materiality. There was no intent to deceive, no masking of an earnings trend, no effect on regulatory capital compliance or debt covenant compliance, no personal enrichment of management, and no concealment of any unlawful transaction.
Fourth, there is no evidence of scienter. While the Staff has not indicated that it is considering fraud charges under Section 10(b) of the Exchange Act or Rule 10b-5 thereunder, and charges under Sections 13(a) and 13(b)(2)(A) do not require proof of scienter, BRB emphasizes the complete absence of any evidence suggesting that the Bank or its management acted with an improper motive. The ACL estimates were the product of an established governance framework involving multiple layers of review by qualified professionals. None of the three senior officers who appeared for investigative testimony—CFO Patricia Navarrete, BridgeFin Division Head Naveen Chakravarti, and Chief Accounting Officer Raymond Hu—provided testimony suggesting any improper pressure to meet earnings targets through ACL manipulation or any awareness that the methodology was flawed.
In addition to these four principal grounds, BRB respectfully directs the Staff's attention to a peer-bank comparison analysis demonstrating that BRB's ACL coverage ratio, charge-off rates, and delinquency disclosures fell well within the interquartile range of comparable digital-lending institutions. This market-context evidence further corroborates the reasonableness of BRB's estimates and undermines any inference that the Bank's disclosures were misleading or anomalous.
BRB has cooperated fully and in good faith with the Staff's investigation from its inception. The Bank has produced 284,617 documents, comprising approximately 1.42 million pages, across six rolling productions between November 1, 2023 and March 1, 2024. BRB made three senior officers available for investigative testimony on the dates requested by the Staff: CFO Patricia Navarrete (January 18, 2024), BridgeFin Division Head Naveen Chakravarti (January 30, 2024), and Chief Accounting Officer Raymond Hu (February 14, 2024). The Bank responded promptly to every Staff request throughout the investigation and has maintained an open and constructive dialogue with the assigned Staff attorneys and accountants.
Before turning to the detailed factual background and legal arguments, a brief overview of BRB provides essential context. Belmont Ridge Bank National Association is a publicly traded national bank listed on the Nasdaq Stock Market under the ticker symbol "BRDG." As of fiscal year-end 2022, BRB reported total assets of $38.2 billion, total deposits of $29.6 billion, and shareholders' equity of $4.03 billion. For the fiscal year ended December 31, 2022, the Bank reported pre-tax income of $612 million and net income of $471.2 million, with approximately 76.7 million diluted shares outstanding and earnings per share of $6.14. The Bank holds OCC Charter No. 24891 and has consistently maintained a CAMELS composite rating of 2 (Satisfactory), reflecting the OCC's assessment that the Bank operates in a fundamentally sound manner.
BRB's BridgeFin division was launched in the third quarter of 2020 as a digital-first consumer lending platform. BridgeFin originates unsecured personal loans (with an average loan size of approximately $18,400) and small-business microloans (with an average loan size of approximately $42,000) through a proprietary AI-driven underwriting model. By fiscal year 2022, BridgeFin had grown to origination volume of $2.87 billion for the year, with $4.1 billion in loans outstanding as of December 31, 2022. BridgeFin operates as a division of BRB, not as a separately incorporated legal entity, and is headed by Senior Vice President Naveen Chakravarti.
BRB adopted ASC 326, the CECL standard, effective January 1, 2020—the mandatory adoption date for SEC filers. The Bank's CECL model for the BridgeFin portfolio employs a vintage-cohort loss-rate methodology, which is one of the estimation approaches specifically recognized by the FASB as appropriate for CECL implementation. The model segments loans by origination quarter and product type, applies historical loss rates to each vintage cohort, and adjusts those rates for current conditions and reasonable and supportable forecasts in accordance with ASC 326-20-30-7. In addition to the quantitative model outputs, BRB's management applies qualitative overlay adjustments based on macroeconomic conditions, unemployment forecasts, portfolio concentration risk, and other relevant factors, consistent with the guidance in the standard.
BRB submits that an enforcement action in this matter would be unwarranted and would set a troubling precedent. The Commission has long recognized that financial reporting necessarily involves the exercise of judgment and the estimation of uncertain future events. CECL, in particular, requires management to estimate expected credit losses over the contractual life of financial assets—an inherently forward-looking exercise that admits of a range of reasonable outcomes. Bringing an enforcement action where the issuer's accounting treatment falls within that range of reasonableness, was made in good faith, was supported by the independent auditor, was consistent with the primary regulator's supervisory assessment, and was accompanied by appropriate disclosure would chill the exercise of good-faith accounting judgment by public company management. Such a result would be inconsistent with the Commission's stated policy and with the public interest.
II. FACTUAL BACKGROUND
A. BRB and the BridgeFin Division
Belmont Ridge Bank National Association is a national banking association organized under the laws of the United States, headquartered at 200 Park Avenue South, 38th Floor, New York, New York 10003. The Bank's common stock is listed on the Nasdaq Stock Market under the ticker symbol "BRDG." BRB holds OCC Charter No. 24891 and is supervised by the Office of the Comptroller of the Currency as its primary federal banking regulator. The Federal Deposit Insurance Corporation provides deposit insurance for BRB's eligible deposits.
BRB operates a diversified banking franchise encompassing traditional commercial banking, retail banking, treasury management, and wealth advisory services. The Bank serves approximately 1.8 million retail customers and approximately 34,000 commercial clients across its branch network and digital channels. As of December 31, 2022, BRB reported total assets of $38.2 billion, total loans and leases of $24.7 billion, total deposits of $29.6 billion, and shareholders' equity of $4.03 billion. For fiscal year 2022, the Bank reported net interest income of $1.34 billion, provision for credit losses of $187.6 million, non-interest income of $412 million, pre-tax income of $612 million, and net income of $471.2 million. With approximately 76.7 million diluted common shares outstanding, BRB reported earnings per share of $6.14 for fiscal year 2022. The Bank's Tier 1 capital ratio was 11.4%, well above the 6.0% threshold for "well capitalized" status under applicable regulatory capital rules. BRB has continuously maintained a CAMELS composite rating of 2 (Satisfactory) since its most recent OCC examination cycle.
The Bank's senior management team during the relevant period consisted of the following individuals:
• Marcus R. Ellingham, Chief Executive Officer
• Patricia "Trish" Navarrete, Chief Financial Officer
• Derek Sung, General Counsel
• Annette Kowalski, Chief Risk Officer
• Raymond Hu, Chief Accounting Officer
• Gwendolyn Prescott, Chair of the Audit Committee of the Board of Directors (independent director)
In the third quarter of 2020, BRB launched its BridgeFin division as a digital-first consumer lending platform designed to serve borrowers and small businesses through an exclusively online origination and servicing channel. BridgeFin was conceived as a strategic growth initiative to extend BRB's lending capabilities into the rapidly growing digital lending market, leveraging the Bank's existing regulatory infrastructure, balance-sheet capacity, and risk management expertise.
BridgeFin operates as a division of BRB and is not a separately incorporated legal entity. The division is headed by Naveen Chakravarti, Senior Vice President and BridgeFin Division Head, who reports to CFO Navarrete and, on risk matters, to CRO Kowalski. BridgeFin's loan originations, servicing, and loss recognition are consolidated within BRB's financial statements and regulatory filings.
BridgeFin's product offerings consist of two principal categories: (i) unsecured personal loans, with an average loan size of approximately $18,400 and terms ranging from 24 to 60 months; and (ii) small-business microloans, with an average loan size of approximately $42,000 and terms ranging from 12 to 36 months. All BridgeFin loans are originated through the platform's proprietary AI-driven underwriting model, which evaluates applicants using traditional credit bureau data supplemented by alternative data sources, including bank-account transaction data, income verification through payroll integrations, and business cash-flow analytics.
BridgeFin experienced rapid growth from its launch. Origination volume grew from $312 million in Q3–Q4 2020 to $1.48 billion in fiscal year 2021 and to $2.87 billion in fiscal year 2022. As of December 31, 2022, BridgeFin had $4.1 billion in loans outstanding, representing approximately 16.6% of BRB's total loan portfolio of $24.7 billion. The BridgeFin portfolio was thus a significant but not dominant component of BRB's overall lending operations.
BridgeFin's growth trajectory and its reliance on AI-driven underwriting in a nascent digital lending market presented credit-risk management challenges that BRB's risk management and accounting teams actively addressed throughout the period at issue. The Bank established dedicated credit-risk monitoring for the BridgeFin portfolio, including monthly performance reviews, quarterly vintage-level loss analyses, and ongoing validation of the AI underwriting model's performance. These processes were overseen by CRO Kowalski and were subject to review by the Audit Committee.
B. BRB's CECL Implementation and ACL Methodology
BRB adopted ASC 326, Financial Instruments—Credit Losses (commonly referred to as CECL), effective January 1, 2020, the mandatory adoption date for public business entities that are SEC filers. The adoption of CECL represented a fundamental change in the methodology for estimating credit losses, shifting from the prior "incurred loss" model under ASC 450-20 to a forward-looking "expected credit loss" model that requires entities to estimate the total expected credit losses over the remaining contractual term of financial assets, adjusted for expected prepayments, at the time of origination or acquisition.
BRB established a cross-functional CECL implementation team in 2018 to develop the Bank's methodology, build the supporting models, and ensure that the Bank's systems, data infrastructure, and governance processes were adequate to support the new standard. The implementation team included representatives from the risk analytics group, the accounting and financial reporting group, the internal audit function, and external consultants. The independent auditor, Whitfield Keane LLP (PCAOB Registration No. 2847), was consulted during the implementation process in its advisory capacity and subsequently evaluated the adopted methodology as part of its annual audit engagement.
For the BridgeFin portfolio, BRB's CECL model employs a vintage-cohort loss-rate methodology, which is one of the estimation approaches explicitly recognized by the FASB as appropriate for CECL implementation. Under this methodology, BridgeFin loans are segmented into cohorts based on their origination quarter and product type (unsecured personal loans and small-business microloans). For each vintage cohort, the model calculates historical loss rates—defined as cumulative net charge-offs as a percentage of original balances—at specified points in the cohort's lifecycle. These historical loss rates are then applied to the remaining contractual life of each active cohort to project expected future losses.
The quantitative component of the model produces an initial estimate of expected credit losses based on the vintage-cohort loss rates, which incorporate the Bank's own historical loss experience as the primary input. Because BridgeFin was launched in Q3 2020 and therefore had a limited proprietary loss history as of the relevant reporting dates, the model supplemented BridgeFin's own loss data with proxy data from comparable digital lending portfolios, adjusted for differences in borrower credit profiles and underwriting criteria. This use of proxy data was documented and disclosed in BRB's filings.
The qualitative overlay component of the model reflects management's assessment of factors that may cause future loss experience to differ from the quantitative model's projections. Consistent with ASC 326-20-30-7, these qualitative adjustments are based on management's evaluation of macroeconomic conditions and forecasts (including GDP growth, unemployment rates, consumer confidence, and interest rate trends), portfolio concentration and composition, changes in underwriting standards, and other relevant environmental factors. The qualitative overlay is documented for each reporting period, with a written narrative explaining the directional adjustments and their supporting rationale.
The CECL model governance process at BRB involves multiple layers of review at each quarterly reporting cycle:
1. The risk analytics team generates the quantitative model outputs, including vintage-level loss rates, projected cumulative losses, and the resulting quantitative ACL estimate for each product segment.
2. The Chief Accounting Officer, Raymond Hu, reviews the model outputs, evaluates the proposed qualitative overlay adjustments, and prepares the recommended ACL for management approval.
3. The Chief Risk Officer, Annette Kowalski, independently reviews the credit-quality inputs, delinquency data, and loss-rate trends that feed the model, and provides her concurrence or recommendations for adjustment.
4. The Chief Financial Officer, Patricia Navarrete, reviews the recommended ACL in the context of the Bank's overall financial reporting, including its effect on the provision for credit losses, net income, and regulatory capital ratios.
5. The Audit Committee of the Board of Directors, chaired by independent director Gwendolyn Prescott, receives a quarterly presentation from management on credit quality, ACL methodology, and the basis for the period's ACL estimate. The Audit Committee reviews and approves the ACL as part of its oversight of the Bank's financial reporting process.
This multi-layered governance process was in place and operating effectively throughout the period covered by the filings at issue.
BRB's independent auditor during the relevant period was Whitfield Keane LLP, a PCAOB-registered public accounting firm (PCAOB Registration No. 2847). The engagement partner for BRB's FY 2021 and FY 2022 audits was Lorraine Dupont. Whitfield Keane audited BRB's consolidated financial statements for fiscal years 2021 and 2022, including the ACL methodology and the resulting ACL balances. As part of the FY 2022 audit, Whitfield Keane identified the BridgeFin ACL as a critical audit matter (as defined by PCAOB Auditing Standard No. 3101) and performed extended procedures to evaluate the reasonableness of the ACL, including testing the vintage-cohort model inputs, evaluating the qualitative overlay adjustments, and performing an independent estimate of expected credit losses using alternative assumptions. Following the completion of these procedures, Whitfield Keane issued an unqualified opinion on BRB's FY 2022 financial statements, dated February 27, 2023. The audit opinion contained no qualification, emphasis-of-matter paragraph, or other modification related to the BridgeFin ACL.
Additionally, BRB's FY 2022 Form 10-K included management's report on internal control over financial reporting and Whitfield Keane's attestation report on the effectiveness of BRB's internal control over financial reporting, as required by Section 404(b) of the Sarbanes-Oxley Act of 2002. Both management and Whitfield Keane concluded that BRB's internal control over financial reporting was effective as of December 31, 2022. No material weakness or significant deficiency related to the ACL or the BridgeFin portfolio was identified.
BRB's prior securities reporting counsel, Caldwell Pratt & Stein LLP (lead partner Martin Caldwell), reviewed and assisted in the preparation of the Form 10-K and Form 10-Q filings at issue. Caldwell Pratt & Stein reviewed the MD&A disclosures, credit-quality tables, and descriptions of the CECL methodology in each filing and provided advice regarding the adequacy of the disclosures under applicable SEC rules and regulations.
C. The Filings at Issue
The three periodic reports that are the subject of the Staff's potential recommendation are as follows:
Form 10-K for Fiscal Year Ended December 31, 2022 (filed February 28, 2023). BRB's FY 2022 Annual Report reported total BridgeFin loans outstanding of $4.1 billion as of December 31, 2022. The Bank reported an ACL for the BridgeFin portfolio of $143.5 million, representing an ACL coverage ratio of 3.50% (i.e., $143.5 million as a percentage of $4.1 billion in outstanding loans). The 10-K reported a net charge-off rate for the BridgeFin portfolio of 2.14% and a 90+ day delinquency rate of 1.72%. The filing included an extensive MD&A discussion of BridgeFin's credit quality, including a description of the CECL methodology, the basis for qualitative overlay adjustments, and narrative discussion of credit trends. The filing also included tabular presentations of the ACL balances by loan category, a rollforward of the ACL for the fiscal year, and vintage-level summary data.
Form 10-Q for the Quarterly Period Ended March 31, 2023 (filed May 10, 2023). BRB's Q1 2023 Quarterly Report updated the BridgeFin credit-quality disclosures as of March 31, 2023. The filing reported updated ACL balances, charge-off data, and delinquency metrics consistent with the Bank's CECL methodology. The MD&A discussion noted the continued growth of the BridgeFin portfolio and provided management's assessment of credit trends during the quarter.
Form 10-Q for the Quarterly Period Ended June 30, 2023 (filed August 9, 2023). BRB's Q2 2023 Quarterly Report similarly updated BridgeFin's credit-quality disclosures as of June 30, 2023. The filing reflected the Bank's continued application of the same CECL methodology, including the re-aging treatment for modified loans, and included MD&A discussion consistent with prior filings.
Each of the three filings at issue included: (i) a description of BRB's CECL methodology, including the vintage-cohort loss-rate approach; (ii) MD&A discussion of BridgeFin credit quality, including management's assessment of credit trends and the factors considered in establishing the ACL; (iii) tabular presentations of ACL balances by loan category; (iv) disclosure of net charge-off rates and delinquency rates; and (v) disclosure of BridgeFin's loan modification program, including the number and aggregate balance of modified loans.
BRB's CEO Marcus R. Ellingham and CFO Patricia Navarrete signed the certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act in connection with each of the three filings.
D. The Re-Aged / Modified Loan Treatment
The core dispute underlying the Staff's potential recommendation concerns BRB's treatment, within its CECL model, of 12,847 loans in the BridgeFin portfolio that were re-aged or modified during the fiscal year 2022 and the first two quarters of fiscal year 2023. These loans had an aggregate outstanding balance of approximately $236.4 million as of December 31, 2022.
The modifications at issue were made pursuant to BridgeFin's loan modification program, which was established in the second quarter of 2021 as a credit-risk management tool and borrower-assistance measure. Under the program, BridgeFin borrowers who experienced temporary financial hardship could apply for modification of their loan terms. The available modification options included: (i) payment deferrals of up to three monthly payments, with the deferred amounts added to the end of the loan term; and (ii) term extensions of up to six months, with no change in interest rate or outstanding principal balance. To qualify for modification, borrowers were required to demonstrate renewed ability to pay through documentation of current income and, in some cases, a trial payment period.
Critically, BRB's modification program imposed specific re-performance criteria before a modified loan could be reclassified to current status. A modified loan was not automatically re-aged upon execution of the modification agreement. Rather, the borrower was required to make at least two consecutive scheduled payments under the modified terms before the loan's delinquency status was reset. This two-payment re-performance requirement was documented in BridgeFin's internal policies and was applied consistently.
After a modified loan met the re-performance criteria, the loan was reclassified from its prior delinquency bucket (e.g., 30–59 days past due, 60–89 days past due, or 90+ days past due) to current status. This reclassification had the effect of resetting the loan's delinquency clock. Because the delinquency buckets are an input to the Bank's CECL vintage-cohort model—specifically, they are used to calibrate the loss rates applied to each vintage cohort—the reclassification of modified loans to current status had the effect of reducing the delinquency percentages that informed the model's loss-rate estimates. In turn, this resulted in lower projected losses and a lower ACL than would have been estimated if the modified loans had remained in their pre-modification delinquency buckets.
The Staff contends that BRB's treatment of these 12,847 modified loans was improper—specifically, that the loans should have remained in their original vintage delinquency buckets for purposes of loss-rate estimation within the CECL model, regardless of the borrowers' demonstrated re-performance. Under the Staff's approach, the 90+ day delinquency rate for the BridgeFin portfolio would have been approximately 2.38% (rather than the 1.72% reported by BRB), and the net charge-off rate would have been approximately 3.05% (rather than the 2.14% reported). The Staff's preliminary view is that these higher delinquency and charge-off inputs would have produced a CECL-compliant ACL of approximately $180.8 million, or 4.41% of outstanding loans, compared to BRB's reported ACL of $143.5 million (3.50% of outstanding). The alleged understatement is thus $37.3 million, representing the difference between the Staff's $180.8 million figure and BRB's $143.5 million figure.
BRB respectfully submits that its treatment of re-aged loans was reasonable, was consistent with applicable OCC supervisory guidance, and was appropriately disclosed, as discussed in detail in Section IV.B below.
E. The SEC Investigation
The chronology of the Staff's investigation is as follows:
• September 18, 2023: BRB received a voluntary request letter from the Division of Enforcement requesting the production of documents related to the Bank's CECL methodology, BridgeFin credit-quality metrics, and the re-aging/modification treatment of BridgeFin loans.
• September 20, 2023: BRB retained Calderwood & Harkness LLP to represent the Bank in connection with the investigation (Engagement No. SC-MAT-2023-4172). Victoria Chambers, Partner, and Jasmine Thornton, Lead Associate, were designated as lead counsel.
• October 12, 2023: The Commission issued a Formal Order of Investigation, Order No. EN-2023-0947, authorizing the use of compulsory process in connection with the investigation.
• October 15, 2023: The Staff issued a document subpoena to BRB, Subpoena No. HO-14287-001, requesting the production of documents in twenty-three specified categories relating to the BridgeFin portfolio, the CECL methodology, ACL governance, loan modification policies, and related communications.
• November 1, 2023 through March 1, 2024: BRB made six rolling document productions in response to the subpoena, producing a total of 284,617 documents comprising approximately 1.42 million pages. All productions were made in TIFF format with extracted text, Bates-numbered BRB-SEC-000001 et seq. The specific production volumes were as follows:
• Production 1 (November 1, 2023): 48,212 documents
• Production 2 (December 15, 2023): 53,890 documents
• Production 3 (January 8, 2024): 41,307 documents
• Production 4 (February 1, 2024): 62,415 documents
• Production 5 (February 15, 2024): 39,881 documents
• Production 6 (March 1, 2024): 38,912 documents
• January 18, 2024: CFO Patricia Navarrete appeared voluntarily for investigative testimony before the Staff.
• January 30, 2024: BridgeFin Division Head Naveen Chakravarti appeared voluntarily for investigative testimony before the Staff.
• February 14, 2024: Chief Accounting Officer Raymond Hu appeared voluntarily for investigative testimony before the Staff.
BRB submitted a privilege log identifying 1,847 documents that were withheld or redacted from production on the grounds of attorney-client privilege, attorney work-product doctrine, or bank-examination privilege. The privilege log was produced in accordance with the Staff's specifications.
The SEC Staff assigned to the investigation includes Senior Staff Attorney Andrea Felton, Staff Attorney Christopher Yuen, Staff Accountant Diane Milosevic, Assistant Director Gregory Bonham, and Branch Chief Renata Moss.
On March 8, 2024, Branch Chief Moss and Assistant Director Bonham conducted a Wells call with counsel for BRB, during which the Staff indicated that it was considering recommending that the Commission bring an enforcement action against BRB under Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 13a-1 and 12b-20 thereunder, based on the alleged material understatement of the BridgeFin ACL in the three filings identified above. The Staff did not indicate that it was considering charges under Section 10(b) of the Exchange Act or Rule 10b-5 thereunder, or that it was considering any action against individual officers or directors of BRB. BRB requested and received the standard thirty-day period to submit a Wells response, which is the present submission.
Throughout the investigation, BRB has cooperated fully and in good faith. The Bank responded promptly to all Staff requests for documents and information, made its senior officers available for testimony on the dates proposed by the Staff without seeking delay, and maintained open lines of communication with the assigned Staff members through counsel. A detailed summary of BRB's cooperation efforts is set forth in Exhibit F.
III. LEGAL STANDARDS
A. Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 13a-1 and 12b-20
Section 13(a) of the Exchange Act, 15 U.S.C. § 78m(a), requires every issuer of a security registered under Section 12 of the Exchange Act to file periodic and other reports with the Commission in conformity with the Commission's rules and regulations. Rule 13a-1, 17 C.F.R. § 240.13a-1, implements this requirement by mandating the filing of annual reports on Form 10-K. Similarly, Rule 13a-13 requires the filing of quarterly reports on Form 10-Q. These periodic reports must comply with the applicable form requirements, which incorporate the financial statement requirements of Regulation S-X and the disclosure requirements of Regulation S-K.
Rule 12b-20, 17 C.F.R. § 240.12b-20, provides that, in addition to the information expressly required to be included in any statement or report, "there shall be added such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading." This rule imposes an affirmative obligation on issuers to include supplemental disclosures where necessary to prevent the required disclosures from conveying a misleading impression.
Section 13(b)(2)(A) of the Exchange Act, 15 U.S.C. § 78m(b)(2)(A), requires every issuer to "make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer." This provision was enacted as part of the Foreign Corrupt Practices Act of 1977 but has been broadly construed to apply to any failure to maintain accurate books and records, regardless of any connection to foreign bribery.
Importantly, Congress deliberately chose the qualifying language "in reasonable detail" and "accurately and fairly" to avoid imposing an absolute standard of precision. As the legislative history makes clear, these terms mean "such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs." See S. Rep. No. 95-114, at 8 (1977); see also SEC v. World-Wide Coin Investments, Ltd., 567 F. Supp. 724, 750 (N.D. Ohio 1983). This standard expressly recognizes that absolute precision is neither required nor attainable in financial reporting and that issuers are entitled to exercise reasonable judgment in maintaining their books and records.
Although violations of Section 13(a) and the reporting rules thereunder, and of Section 13(b)(2)(A), are strict liability offenses that do not require proof of scienter, the Commission and the courts have recognized that the absence of scienter is relevant to the exercise of prosecutorial discretion, the appropriateness of penalties, and the assessment of whether the issuer's reporting was "in reasonable detail" and "accurately and fairly" reflective of its assets and transactions. See, e.g., SEC v. McNulty, 137 F.3d 732, 740–41 (2d Cir. 1998) (noting that Section 13(b)(2)(A) includes a reasonableness qualifier).
The Staff's potential recommendation in this matter implicates a further foundational principle: materiality. A violation of Section 13(a) and Rules 13a-1 and 12b-20 requires that the alleged reporting deficiency be material. Information is material if "there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision." TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); accord Basic Inc. v. Levinson, 485 U.S. 224, 231–32 (1988). The materiality inquiry is inherently fact-specific and requires consideration of the "total mix" of information available to investors. Id.
The application of materiality principles to accounting estimates is a matter of particular sensitivity, because financial statements are, by their nature, permeated with estimates and judgments. As the Commission has recognized, "accounting involves the exercise of judgment and is not an exact science," and "an enforcement action should not be premised on a difference of opinion between the staff and the issuer regarding an accounting estimate, where the issuer's estimate is within the range of reasonable alternatives." See SEC Staff Accounting Bulletin No. 99, "Materiality" (Aug. 12, 1999) ("SAB No. 99"); see also In re Howard Sirota, Exchange Act Release No. 61179 (Dec. 18, 2009) (Commission declining to pursue enforcement action where the respondent's accounting estimate was within a reasonable range).
B. CECL (ASC 326) and Allowance for Credit Losses
ASC 326, Financial Instruments—Credit Losses, was issued by the Financial Accounting Standards Board in June 2016 and became effective for SEC filers on January 1, 2020. The standard fundamentally changed the loss estimation framework for financial institutions by replacing the prior "incurred loss" model—which required recognition of credit losses only when it became probable that a loss had been incurred—with an "expected credit loss" model requiring entities to estimate the total expected credit losses over the remaining contractual term of financial assets at the time of initial recognition, adjusted for expected prepayments.
The CECL model is an inherently forward-looking framework. It requires entities to consider not only historical loss experience and current conditions, but also "reasonable and supportable forecasts" of future economic conditions that may affect expected credit losses. ASC 326-20-30-7 identifies a non-exhaustive list of factors that entities should consider in making these estimates, including past events, current conditions, and reasonable and supportable forecasts. The standard acknowledges that forecasting future conditions involves significant estimation uncertainty and that management must exercise substantial judgment in applying the model.
Critically, ASC 326 does not mandate a single loss estimation methodology. The standard permits entities to select from a range of estimation approaches, including vintage analysis, probability-of-default/loss-given-default models, loss-rate methods, roll-rate methods, and discounted-cash-flow analyses. ASC 326-20-55 provides implementation guidance indicating that the selection of an appropriate methodology is a matter of management judgment, taking into account the nature of the financial asset pool, the availability of relevant data, and the entity's historical loss experience. The FASB's Transition Resource Group for Credit Losses has further emphasized that the standard was designed to accommodate a diversity of approaches, recognizing that different methodologies may produce different estimates—all of which may be reasonable under the standard.
The SEC Staff has itself acknowledged the estimation uncertainty inherent in CECL. In various public statements and guidance documents, the Staff has noted that "CECL involves significant judgment," that "estimates are expected to vary among entities," and that "there is no single 'right answer' for the amount of expected credit losses for a given portfolio." These statements reflect the reality that CECL implementation is an evolving process and that good-faith differences in judgment are to be expected.
C. Commission Precedent Regarding Accounting Estimates
The Commission has long recognized the importance of exercising restraint in pursuing enforcement actions based on accounting estimates, particularly where the issuer's treatment reflects a reasonable interpretation of the applicable accounting standard. This principle is rooted in the Commission's acknowledgment that enforcement actions based on close-call accounting judgments have a chilling effect on the exercise of good-faith management discretion, which ultimately disserves the interests of investors and the capital markets.
The Commission's enforcement policy with respect to accounting estimates is grounded in several principles. First, where an accounting standard permits a range of reasonable outcomes—as CECL explicitly does—the Commission should not bring an enforcement action merely because the issuer's estimate falls at a different point in the range than the Staff would prefer. Second, the Commission should consider whether the issuer's estimate was developed through an appropriate governance process, was reviewed by qualified professionals, and was supported by reasonable documentation. Third, the Commission should consider whether the issuer's independent auditor concurred with the accounting treatment. While auditor concurrence does not immunize an issuer from enforcement action, it is a significant indicator that the treatment fell within the range of reasonable alternatives.
These principles have particular force in the loan-loss context, where loss estimation is inherently uncertain and where the range of defensible estimates can be substantial. Historically, the Commission has reserved enforcement actions in this area for cases involving clear departures from GAAP—such as deliberate manipulation of loss reserves to smooth earnings, intentional suppression of delinquency data, or wholesale disregard of established loss estimation methodologies—rather than for cases involving good-faith differences in methodological judgment.
D. Materiality Analysis
The materiality of the alleged understatement in this matter must be assessed under the framework established by the Supreme Court in TSC Industries and Basic Inc., as applied through the guidance in SAB No. 99. SAB No. 99 establishes that materiality cannot be assessed by reference to a single quantitative threshold; rather, both quantitative and qualitative factors must be considered.
Quantitative analysis. BRB's internal materiality threshold is set at 5% of pre-tax income. For fiscal year 2022, BRB reported pre-tax income of $612 million, yielding a quantitative materiality threshold of $30.6 million. The Staff's alleged understatement of $37.3 million exceeds this quantitative threshold by approximately $6.7 million. Standing alone, this quantitative exceedance might suggest that the alleged understatement is material. However, SAB No. 99 expressly instructs that a quantitative exceedance is not dispositive and that qualitative factors must also be evaluated.
Qualitative analysis. SAB No. 99 identifies a number of qualitative factors that should be considered in assessing the materiality of a known misstatement or error. Applied to the present matter, each of these factors weighs against a finding of materiality:
1. Whether the misstatement arises from an item capable of precise measurement or from an estimate and, if so, the degree of imprecision inherent in the estimate. The alleged understatement arises entirely from a difference in the estimation methodology for expected credit losses under CECL—an inherently imprecise exercise that the FASB and the Commission have acknowledged involves significant judgment and a range of reasonable outcomes.
2. Whether the misstatement masks a change in earnings or other trends. BRB's overall profitability was robust and transparent. The Bank's pre-tax income of $612 million and net income of $471.2 million for FY 2022 were clearly disclosed, and there was no attempt to mask a deterioration in earnings performance or a change in earnings trends.
3. Whether the misstatement hides a failure to meet analysts' consensus expectations. The $37.3 million difference was below any single analyst's forecast variance for BRB's provision expense. BRB's reported earnings per share of $6.14 exceeded the consensus analyst estimate at the time of filing.
4. Whether the misstatement changes a loss into income or vice versa. It does not. BRB was solidly profitable in FY 2022 under either methodology.
5. Whether the misstatement concerns a segment or other portion of the registrant's business that has been identified as playing a significant role in the registrant's operations or profitability. While BridgeFin is a growing division, the $37.3 million difference represents less than 0.10% of BRB's total assets and approximately 0.93% of shareholders' equity. These percentages are well below any conventional materiality threshold when measured against the Bank's balance sheet.
6. Whether the misstatement affects the registrant's compliance with regulatory requirements. The alleged understatement had no effect on BRB's regulatory capital compliance. The Bank's Tier 1 capital ratio of 11.4% was well in excess of the "well capitalized" threshold, and a $37.3 million increase in the ACL (and corresponding reduction in equity) would have had a de minimis effect on the capital ratio.
7. Whether the misstatement affects the registrant's compliance with loan covenants or other contractual requirements. BRB has identified no loan covenants or other contractual obligations that would have been triggered or affected by the alleged understatement.
8. Whether the misstatement has the effect of increasing management's compensation. There is no evidence that the ACL treatment had any effect on management compensation. BRB's executive compensation is determined by the Compensation Committee of the Board based on range performance metrics, and the ACL for a single portfolio segment is not a direct input to compensation determinations.
9. Whether the misstatement involves concealment of an unlawful transaction. There is no allegation or evidence of any unlawful transaction.
In sum, the quantitative exceedance is marginal—$6.7 million above the threshold in absolute terms, or approximately 1.1% of pre-tax income—and every relevant qualitative factor weighs against a finding of materiality. Under the SAB No. 99 framework, the alleged understatement is not material.
IV. ARGUMENT
A. BRB's CECL Methodology Was Reasonable and Within the Range of Acceptable Estimates Under ASC 326
The Staff's potential recommendation rests on the premise that BRB's reported ACL of $143.5 million for the BridgeFin portfolio was materially understated. As demonstrated below, however, BRB's ACL estimate was reasonable, was produced by an appropriate methodology, was supported by robust internal governance, was reviewed and concurred in by the Bank's independent auditor, and fell within the range of acceptable estimates under ASC 326. The Staff's alternative estimate of $180.8 million represents one possible point on a continuum of legitimate accounting judgment—it does not render BRB's estimate unreasonable or actionable.
ASC 326 does not mandate a single methodology. As discussed in Section III.B, ASC 326 explicitly permits entities to select from a range of estimation approaches. BRB's vintage-cohort loss-rate methodology is one of the approaches specifically contemplated by the standard and is widely used by financial institutions, including digital lending platforms, for purposes of CECL compliance. The FASB's Transition Resource Group for Credit Losses has confirmed that vintage analysis is an appropriate methodology for pools of financial assets with similar risk characteristics, such as the BridgeFin portfolio.
BRB's model was subject to robust internal governance. The ACL estimate for the BridgeFin portfolio was not the product of a single individual's judgment. It was developed by the Bank's risk analytics team, reviewed by the Chief Accounting Officer (Raymond Hu), independently assessed by the Chief Risk Officer (Annette Kowalski), approved by the Chief Financial Officer (Patricia Navarrete), and presented to and reviewed by the Audit Committee of the Board of Directors (chaired by independent director Gwendolyn Prescott). This multi-layered governance process, which operated at each quarterly reporting cycle, was designed to ensure that the ACL estimate reflected a balanced and informed judgment incorporating diverse perspectives.
The independent auditor concurred. Whitfield Keane LLP, BRB's independent auditor (PCAOB Registration No. 2847), audited the Bank's CECL methodology and the resulting ACL as part of its FY 2022 audit engagement. Engagement partner Lorraine Dupont specifically evaluated the BridgeFin ACL, including the treatment of re-aged loans, as a critical audit matter. Whitfield Keane performed extended audit procedures, including testing the vintage-cohort model inputs, evaluating the qualitative overlay adjustments, and independently estimating expected credit losses using alternative assumptions. At the conclusion of these procedures, Whitfield Keane issued an unqualified opinion on BRB's FY 2022 financial statements. The auditor did not propose any adjustment to the BridgeFin ACL, issue any management letter comment regarding the ACL methodology, or identify any material weakness or significant deficiency in BRB's internal controls related to the ACL. While auditor concurrence does not create an absolute defense, it is powerful evidence that BRB's methodology and resulting estimate were within the range of reasonable alternatives under GAAP.
The ACL estimate was within the range of reasonable estimates. BRB engaged Brindoval Analytic Partners LLC—an independent forensic accounting firm—to evaluate the reasonableness of the Bank's CECL methodology and ACL estimate in connection with this investigation. Dr. Franklin Osei, CPA, CFF, a principal at Brindoval and a recognized expert in credit-loss estimation and CECL implementation, conducted a detailed analysis of BRB's vintage-cohort model, the re-aging treatment, and the resulting ACL. Dr. Osei's report, attached hereto as Exhibit A, concludes that BRB's methodology was consistent with ASC 326 and that the resulting ACL of $143.5 million falls within the range of reasonable estimates for the BridgeFin portfolio under the standard. Dr. Osei's analysis demonstrates that the range of defensible ACL estimates for the BridgeFin portfolio, given the data and assumptions available as of the relevant reporting dates, extends from approximately $131 million to approximately $192 million—and that both BRB's reported figure of $143.5 million and the Staff's alternative figure of $180.8 million fall within this range. The two figures represent different, but equally defensible, exercises of accounting judgment.
The Staff's estimate is an alternative, not a correction. The Staff's preliminary view that the ACL should have been approximately $180.8 million is based on the assumption that re-aged loans should have been retained in their original vintage delinquency buckets. As discussed in Section IV.B, this assumption reflects a methodological preference rather than a GAAP requirement. The Staff's approach would have produced a higher ACL, but that does not make it the "correct" answer. Under ASC 326, there is no single correct ACL for a given portfolio. The standard requires management to exercise judgment, and different exercises of that judgment can produce different but equally reasonable outcomes. The $37.3 million difference between BRB's estimate and the Staff's estimate reflects a legitimate difference in judgment about the appropriate treatment of re-aged loans—not a data error, omission, concealment, or manipulation.
An enforcement action premised on the Staff's preference for a different methodological treatment, where BRB's treatment was within the range of reasonable alternatives, was supported by the independent auditor, and was consistent with the primary regulator's supervisory assessment, would constitute precisely the type of action that the Commission has historically—and wisely—declined to bring.
B. The Re-Aging Treatment Was Consistent with OCC Supervisory Guidance and Was Disclosed
BRB's treatment of the 12,847 re-aged and modified BridgeFin loans (with an aggregate outstanding balance of $236.4 million) was consistent with applicable OCC supervisory guidance and was appropriately disclosed in the filings at issue. The Staff's contention that these loans should have been retained in their original vintage delinquency buckets is a methodological preference, not a requirement of GAAP, regulatory guidance, or industry practice.
Consistency with OCC supervisory guidance. The OCC's Comptroller's Handbook on "Allowance for Credit Losses" addresses the treatment of modified and restructured loans for purposes of credit-loss estimation. The guidance recognizes that banks may reset the delinquency status of modified loans where the borrower has demonstrated renewed ability to pay, provided that the bank applies appropriate re-performance criteria and maintains adequate documentation and internal controls over the modification and re-aging process. BRB's BridgeFin loan modification program satisfied each of these conditions:
• The program established specific eligibility criteria for modification, requiring borrowers to demonstrate temporary financial hardship and a reasonable basis for expecting renewed payment performance.
• The program imposed a two-payment re-performance requirement: a modified loan was not re-aged to current status until the borrower had made at least two consecutive scheduled payments under the modified terms.
• The program required documentation of each modification, including the basis for the modification, the modified terms, and the borrower's re-performance history.
• The program was administered under internal controls that included supervisory review of modification decisions and periodic quality-assurance testing by the internal audit function.
The OCC's concurrent supervisory assessment found no deficiency. BRB is subject to continuous supervision by the OCC as its primary federal banking regulator. During the period covered by the filings at issue, the OCC conducted its regular supervisory assessment of BRB's credit-risk management practices, including a review of the BridgeFin portfolio and the Bank's ACL methodology. The OCC's assessment, as summarized in Exhibit D (redacted for bank-examination privilege), found no material deficiency in BRB's ACL methodology, including the treatment of re-aged loans. BRB has continuously maintained a CAMELS composite rating of 2 (Satisfactory) under OCC Charter No. 24891, reflecting the OCC's overall assessment that the Bank operates in a fundamentally sound manner with adequate risk management practices.
The significance of the OCC's supervisory assessment cannot be overstated. The OCC has deep expertise in credit-loss estimation and has been at the forefront of regulatory guidance on CECL implementation for national banks. The fact that the OCC—the Bank's primary federal regulator and the regulatory body most directly responsible for overseeing the safety and soundness of BRB's lending practices—reviewed BRB's ACL methodology during the relevant period and found no material deficiency is powerful evidence that BRB's approach was within the bounds of reasonable practice.
The treatment was disclosed. BRB disclosed the existence and impact of its loan modification program in each of the three filings at issue. The FY 2022 Form 10-K and the Q1 2023 and Q2 2023 Forms 10-Q each included: (i) a description of BridgeFin's loan modification program in the MD&A section; (ii) disclosure of the number and aggregate balance of loans that had been modified under the program; and (iii) a description of the methodology for classifying modified loans for purposes of delinquency bucketing and loss estimation. Investors reviewing BRB's filings had access to the information necessary to understand the Bank's treatment of modified loans and its effect on reported credit-quality metrics.
The Staff's alternative approach is a preference, not a mandate. The Staff's position—that re-aged loans should have been retained in their original vintage delinquency buckets, regardless of the borrower's demonstrated re-performance—is one possible approach, but it is not required by GAAP, by OCC guidance, or by any other applicable standard. ASC 326 does not prescribe the specific inputs to be used in a vintage-cohort model, including the treatment of delinquency buckets for modified loans. The standard requires that the methodology produce a reasonable estimate of expected credit losses; it does not dictate the granular mechanics of how loan-level data should be classified within the model. Had the Staff's approach been mandated by GAAP or by regulatory guidance, BRB would have implemented it. It was not mandated, and BRB exercised the judgment that ASC 326 contemplates.
C. The Difference Between BRB's ACL and the Staff's Preliminary View Represents a Good-Faith Judgment Call, Not a Misstatement
The $37.3 million difference between BRB's reported BridgeFin ACL of $143.5 million and the Staff's preliminary estimate of $180.8 million is entirely attributable to the methodological treatment of re-aged loans. It does not arise from any data error, mathematical mistake, omission of relevant information, or manipulation of model inputs. It represents a good-faith difference in accounting judgment regarding the appropriate treatment of a single category of loans within a complex estimation model.
A detailed reconciliation of the key differences is as follows:
As this reconciliation makes clear, every difference between the two figures is traceable to a single methodological input: the classification of re-aged loans for purposes of delinquency bucketing. Under BRB's approach, loans that met the two-payment re-performance criteria were reclassified to current status, reducing delinquency percentages and, consequently, loss-rate estimates. Under the Staff's approach, the same loans would have remained in their prior delinquency buckets, producing higher delinquency percentages and higher loss-rate estimates. There are no other differences between the two approaches—no allegations of data errors, unreported charge-offs, or manipulation of qualitative overlay adjustments.
BRB's management—including CFO Patricia Navarrete, Chief Accounting Officer Raymond Hu, and BridgeFin Division Head Naveen Chakravarti—exercised good-faith judgment in adopting and applying BRB's CECL methodology. The treatment of re-aged loans was not an ad hoc decision made in the context of a particular reporting period to achieve a desired financial result. It was a standing methodological choice, established as part of BRB's CECL implementation and applied consistently across all reporting periods. The treatment was documented in the Bank's CECL model documentation, reviewed by the independent auditor, and presented to the Audit Committee. Declarations from CFO Navarrete and CAO Hu attesting to the good-faith basis for the ACL estimates and describing the internal controls over financial reporting are attached as Exhibit E.
Materiality analysis. As discussed in Section III.D, the $37.3 million difference marginally exceeds BRB's internal quantitative materiality threshold of $30.6 million (5% of FY 2022 pre-tax income of $612 million)