MEMORANDUM — ATTORNEY WORK PRODUCT / PRIVILEGED AND CONFIDENTIAL
TO: Victoria Chambers, Partner
FROM: Jasmine Thornton, Lead Associate
CC: Howard Quinn, Partner; Liam Donahue, Associate
DATE: January 19, 2024
RE: Post-Testimony Debrief — Investigative Testimony of Patricia Navarrete, CFO, Belmont Ridge Bank NA; SEC Investigation File No. HO-14287 (Formal Order No. EN-2023-0947)
MATTER NO.: SC-MAT-2023-4172
PRIVILEGE DESIGNATION: This memorandum constitutes attorney work product prepared in anticipation of litigation and is protected by the work-product doctrine under Federal Rule of Civil Procedure 26(b)(3) and applicable state-law analogues. It also contains attorney-client privileged communications within the meaning of the attorney-client privilege. This memorandum reflects the mental impressions, conclusions, opinions, and legal theories of counsel at Calderwood & Harkness LLP. This memorandum is not to be disclosed, disseminated, or distributed outside of Calderwood & Harkness LLP without the express prior written authorization of the responsible partner, Victoria Chambers.
I. Executive Summary
Patricia "Trish" Navarrete, Chief Financial Officer of Belmont Ridge Bank National Association ("BRB" or the "Bank"), provided investigative testimony on January 18, 2024, before Staff of the Division of Enforcement of the U.S. Securities and Exchange Commission ("SEC" or "Commission"). The testimony was conducted in the offices of Calderwood & Harkness LLP, located at 425 Lexington Avenue, 30th Floor, New York, NY 10017, pursuant to a testimony subpoena issued on November 22, 2023, under the authority of the Formal Order of Investigation (Order No. EN-2023-0947, issued October 12, 2023) in SEC Investigation File No. HO-14287.
The testimony lasted approximately five hours and forty minutes, inclusive of breaks. The session commenced at approximately 9:30 a.m. and concluded at approximately 4:45 p.m., with a one-hour lunch recess (12:15 p.m. to 1:15 p.m.) and three shorter breaks of approximately ten to fifteen minutes each at various points throughout the proceeding.
The following SEC Staff members were present for the testimony:
• Andrea Felton, Senior Staff Attorney, Division of Enforcement
• Christopher Yuen, Staff Attorney, Division of Enforcement
• Diane Milosevic, Staff Accountant, Division of Enforcement
The following Calderwood & Harkness LLP attorneys were present on behalf of Ms. Navarrete and BRB:
• Victoria Chambers, Partner
• Jasmine Thornton, Lead Associate
• Liam Donahue, Working Associate
A court reporter was present and recorded the entire proceeding on the record. The testimony was administered under oath. Pursuant to our standard arrangement with the Staff, Calderwood & Harkness will receive a copy of the transcript, which we have ordered and expect to receive within approximately ten to fourteen business days.
Overall Assessment: Ms. Navarrete was composed, well-prepared, and responsive throughout the approximately five hours and forty minutes of testimony. She effectively articulated the reasonableness of BRB's current expected credit loss ("CECL") methodology, as codified under Accounting Standards Codification Topic 326 ("ASC 326"), and the good-faith basis for the Bank's reported allowance for credit losses ("ACL") as of December 31, 2022. She demonstrated strong command of the key facts, maintained consistent positions, and appropriately deferred to the Bank's Chief Accounting Officer, Raymond Hu, on granular technical questions related to model inputs. She did not provide any testimony that was inconsistent with BRB's prior document productions or positions communicated by Calderwood & Harkness to the Staff.
However, the Staff's questioning revealed a focused and well-developed enforcement theory centered on BRB's treatment of 12,847 re-aged or modified loans in the BridgeFin portfolio and the effect of that treatment on vintage-cohort loss-rate estimation within the CECL model. The Staff appears to have conducted a detailed loan-level analysis of BridgeFin data and is pressing the position that BRB's re-aging practice resulted in a materially understated ACL. This memorandum provides a detailed account of the testimony, assesses its implications for the defense, and recommends next steps for the team.
II. Testimony Format and Ground Rules
The testimony was conducted as a standard SEC investigative testimony under oath, pursuant to the authority of the Formal Order of Investigation. Ms. Navarrete was sworn in by the court reporter at approximately 9:30 a.m. after a brief off-the-record introduction by Ms. Felton, during which she confirmed that the testimony was being taken in connection with SEC Investigation File No. HO-14287 and identified the applicable provisions of the Securities Exchange Act of 1934 (the "Exchange Act") and the rules promulgated thereunder.
Ms. Felton served as the primary questioner and conducted approximately seventy percent (70%) of the questioning. She led the examination on background, BridgeFin portfolio overview, the re-aging/modification treatment, materiality, internal controls, and disclosure-related topics. Ms. Milosevic handled the technical accounting questions, including detailed inquiries concerning the CECL model's vintage-cohort approach, macroeconomic forecast variable selection, the reasonable and supportable forecast period, reversion methodology, and qualitative overlay calibration. Ms. Milosevic's questioning was precise and demonstrated a strong working knowledge of CECL implementation challenges at banking institutions. Mr. Yuen asked a limited number of follow-up questions, primarily on factual details related to the timing of communications with BRB's external auditor, Whitfield Keane LLP.
Off-the-record conferences between the witness and counsel were taken at appropriate intervals throughout the day. These conferences were brief, typically lasting between five and ten minutes, and were used to address logistical matters, review exhibits that the Staff intended to introduce, and provide Ms. Navarrete with an opportunity to consult with counsel before resuming testimony on sensitive topics.
No objections to the form or scope of questions were necessary during the testimony, with one exception: counsel instructed Ms. Navarrete not to answer a question posed by Ms. Felton regarding a specific communication between Ms. Navarrete and Martin Caldwell of Caldwell Pratt & Stein LLP in connection with the preparation of the FY 2022 Form 10-K. This instruction was based on the attorney-client privilege, as the communication at issue was a privileged legal consultation relating to the drafting and review of disclosure language in the Form 10-K prior to its filing on February 28, 2023. Ms. Felton noted the privilege objection on the record and asked whether BRB was asserting attorney-client privilege as to that communication. Victoria Chambers confirmed on the record that BRB was asserting attorney-client privilege over that communication, and Ms. Felton did not press further. No motion to compel or referral to the Commission was threatened at that time.
During the course of the testimony, the Staff showed Ms. Navarrete approximately eighteen (18) exhibits. These included, among other documents, excerpts from BRB's FY 2022 Form 10-K (filed with the Commission on February 28, 2023), excerpts from the Q1 2023 Form 10-Q (filed May 10, 2023), excerpts from the Q2 2023 Form 10-Q (filed August 9, 2023), internal ACL committee meeting minutes from four quarterly meetings (Q3 2022, Q4 2022, Q1 2023, and Q2 2023), BridgeFin credit-quality dashboard reports, internal email correspondence, BRB's loan modification policy document, and SOX 302 certifications signed by Ms. Navarrete. A detailed list of exhibits is set forth in Section VII below.
III. Summary of Key Questioning Areas and Witness Responses
A. Background and Role
The testimony commenced with standard background questions regarding Ms. Navarrete's educational background, professional experience, tenure as CFO of Belmont Ridge Bank, reporting structure, and areas of responsibility. Ms. Felton led this portion of the questioning, which lasted approximately twenty-five minutes.
Ms. Navarrete testified that she has served as CFO of Belmont Ridge Bank since March 2018, reporting directly to the Bank's Chief Executive Officer, Gerald Hargrove. She holds a Bachelor of Science degree in Accounting from the University of Virginia and a Master of Business Administration from Columbia Business School. She is a Certified Public Accountant licensed in the State of New York. Prior to joining BRB, she served in various financial leadership positions at two other financial institutions and spent the early portion of her career at a Big Four accounting firm.
Ms. Navarrete described her responsibilities as encompassing oversight of all aspects of BRB's financial reporting, including the preparation and filing of periodic reports with the SEC, treasury and capital management functions, investor relations, and coordination with the Bank's external auditor. She confirmed that she is the Bank's principal financial officer for purposes of the Exchange Act's certification requirements.
Ms. Felton asked specifically about Ms. Navarrete's involvement with BRB's adoption of CECL under ASC 326, which became effective for BRB on January 1, 2020. Ms. Navarrete testified that she played an active role in the Bank's CECL transition, including overseeing the formation of an internal implementation task force, engaging external consultants to assist with model development, and coordinating with Whitfield Keane LLP to ensure that the chosen methodology was appropriate and would withstand audit scrutiny. She noted that the adoption of CECL required significant investment in data infrastructure, analytics capabilities, and credit-risk modeling, and that the Bank began its transition planning approximately two years prior to the effective date.
With respect to the ongoing ACL estimation process, Ms. Navarrete explained her role as the senior executive responsible for reviewing and approving the quarterly ACL before it is incorporated into BRB's financial statements. She described a structured governance process in which the credit-risk analytics team, under the direction of Raymond Hu (Chief Accounting Officer), runs the CECL model on a quarterly basis using current loan-level data, macroeconomic forecasts, and qualitative adjustment factors. The model output is then reviewed by the ACL committee, which is chaired by Annette Kowalski, Chief Risk Officer, and includes representatives from credit risk, finance, internal audit, and the Chief Accounting Officer's team. The ACL committee evaluates the model results, considers whether additional qualitative overlays are warranted, and makes a recommendation to Ms. Navarrete. Ms. Navarrete testified that she reviews the ACL committee's recommendation, the supporting data, and the model documentation before providing her sign-off, after which the ACL is presented to the Bank's Audit Committee of the Board of Directors.
Ms. Navarrete also described her interaction with Whitfield Keane LLP (independent auditor; engagement partner Lorraine Dupont, PCAOB Registration No. 2847). She testified that she meets with the Whitfield Keane engagement team at the beginning and end of each quarterly close cycle and participates in periodic status calls during the annual audit. She noted that the ACL is consistently one of the most significant audit areas discussed with the external auditor, given the inherent judgment involved in CECL estimation.
B. BridgeFin Portfolio Overview and Growth
The next section of questioning, led primarily by Ms. Felton with some follow-up from Ms. Milosevic, focused on the BridgeFin portfolio — BRB's digital-lending platform for consumer personal loans and micro-business loans. This segment lasted approximately thirty minutes.
Ms. Navarrete testified that BridgeFin was launched in the third quarter of 2020 as a strategic initiative to expand BRB's consumer and small-business lending through a digital-first platform. She described BridgeFin as leveraging an artificial-intelligence-driven underwriting model that was designed to assess creditworthiness using both traditional and alternative data sources, enabling faster loan decisions and broader access to credit for borrowers who might not qualify under traditional underwriting criteria.
Ms. Felton asked about the growth trajectory of the BridgeFin portfolio. Ms. Navarrete testified that BridgeFin experienced rapid growth from its launch through the end of fiscal year 2022. She confirmed that BridgeFin originations totaled approximately $2.87 billion in FY 2022 and that the total outstanding balance of BridgeFin loans was approximately $4.1 billion as of December 31, 2022. She acknowledged that BridgeFin had grown from essentially zero in Q3 2020 to a $4.1 billion portfolio in slightly over two years, which she characterized as "strong but managed growth" consistent with BRB's strategic plan.
In response to questions about loan characteristics, Ms. Navarrete testified that the average loan size for BridgeFin personal loans was approximately $18,400 and for BridgeFin micro-business loans was approximately $42,000. She described typical loan terms, which ranged from twenty-four to sixty months for personal loans and up to seventy-two months for micro-business loans. She noted that borrower credit profiles spanned a range, with a substantial portion of BridgeFin borrowers falling in the near-prime to prime credit score bands.
Ms. Navarrete testified that BridgeFin's AI-driven underwriting model was validated both internally by BRB's model-risk management function and by third-party consultants engaged to provide independent model validation. She stated that the model's performance was monitored on an ongoing basis through established model-risk management protocols, which included periodic back-testing, sensitivity analysis, and ongoing monitoring of key performance metrics such as approval rates, default rates, and loss severity.
Ms. Felton then pressed on whether the rapid growth of the BridgeFin portfolio — from its launch in Q3 2020 to a $4.1 billion outstanding balance by year-end 2022 — created challenges for the CECL model, which relies on historical loss data to estimate expected credit losses over the life of the loans. This was a pointed question, and Ms. Navarrete handled it well. She acknowledged that the relatively short vintage history of the BridgeFin portfolio — at most approximately two and a half years of performance data as of December 31, 2022 — meant that the CECL model did not have the benefit of a full economic cycle of loss experience for this particular portfolio. She stated that this limitation was recognized by the ACL committee and by management, and that enhanced qualitative overlays were applied to the BridgeFin ACL estimate to account for this model limitation, the inherent uncertainty associated with a rapidly growing portfolio, and the lack of a longer track record. She maintained that those qualitative overlays were specifically documented, reviewed by the ACL committee, and considered by Whitfield Keane during the audit.
C. CECL Methodology and ACL Estimation — Core Focus
The most extensive segment of the testimony — lasting approximately ninety minutes — was devoted to BRB's CECL methodology as applied to the BridgeFin portfolio and the resulting ACL estimate. This area was explored jointly by Ms. Felton and Ms. Milosevic, with Ms. Milosevic leading the more technically granular lines of inquiry.
Ms. Navarrete described BRB's methodology as a vintage-cohort approach, in which BridgeFin loans are grouped by origination quarter (i.e., the quarter in which the loan was originated) to form cohorts. For each cohort, the CECL model estimates a lifetime expected loss rate based on historical cohort performance, adjusted for current conditions and for reasonable and supportable forecasts of future economic conditions, as required by ASC 326-20-30. The expected loss rate for each vintage cohort is then applied to the outstanding balance of loans in that cohort to determine the required ACL. The total BridgeFin ACL is the sum of the allowance amounts across all vintage cohorts, plus any qualitative overlay adjustments that the ACL committee determines are appropriate.
Ms. Navarrete confirmed that the reported ACL for the BridgeFin portfolio as of December 31, 2022, was $143.5 million, which represented approximately 3.50% of the $4.1 billion in outstanding BridgeFin loans. She testified that this ACL level was the product of the CECL model output, as adjusted for qualitative overlays, and that it had been reviewed and approved through the governance process described earlier.
Ms. Milosevic then asked a series of detailed technical questions about specific model inputs. She inquired about the selection of macroeconomic forecast variables used in the CECL model, asking which variables were included, how they were weighted, and what economic forecast scenario or scenarios were used as of the December 31, 2022, measurement date. Ms. Navarrete provided an overview-level response, explaining that the model incorporated several macroeconomic variables — including unemployment rate, GDP growth, consumer price index, housing price index, and consumer credit spreads — and that the Bank used a probability-weighted multi-scenario forecast approach that blended a baseline scenario, an upside scenario, and a downside scenario, with scenario weights determined by the ACL committee based on the prevailing economic outlook. For the more granular details of variable selection, weighting, and sensitivity, Ms. Navarrete deferred to Raymond Hu, noting that Mr. Hu and the credit-risk analytics team were responsible for the technical model architecture and calibration and that she relied on their expertise in these areas as part of the governance process.
Ms. Milosevic also asked about the length of the reasonable and supportable forecast period used in the CECL model and the methodology employed to revert from the forecast period to historical loss experience for the remaining life of the loans. Ms. Navarrete testified that BRB used a reasonable and supportable forecast period of approximately two years, after which the model reverted to long-run historical average loss rates using a straight-line reversion over an additional one-year period. She acknowledged that the selection of the forecast period and the reversion method involved management judgment, and she stated that these inputs were reviewed by the ACL committee and discussed with Whitfield Keane. Again, she deferred to Mr. Hu for the more granular technical details of the reversion methodology and the historical loss-rate assumptions.
Throughout this segment of the testimony, Ms. Navarrete demonstrated a solid understanding of the CECL framework and BRB's implementation of it, while appropriately and consistently noting the division of responsibilities between herself, as CFO, and Mr. Hu and the credit-risk analytics team, who were responsible for the day-to-day model operations. This appropriate deference was well-executed and should not be viewed as evasive; rather, it reflects the reality of how a CFO at an institution of BRB's size oversees a complex estimation process.
D. Re-Aging / Loan Modification Treatment — Primary Dispute
This segment of the testimony was clearly the central focus of the Staff's examination and occupied approximately seventy-five minutes of questioning time. Both Ms. Felton and Ms. Milosevic participated actively in this segment, with Ms. Felton leading the factual and disclosure-related questions and Ms. Milosevic handling the accounting-treatment and methodology questions.
Ms. Felton and Ms. Milosevic questioned Ms. Navarrete extensively about BRB's practice of treating 12,847 re-aged or modified BridgeFin loans — with an aggregate outstanding balance of approximately $236.4 million — as "current" for purposes of vintage-cohort assignment after those loans had been modified or re-aged. Ms. Felton established through questioning that "re-aging" in this context referred to the practice of resetting a borrower's delinquency status to "current" upon the successful execution of a loan modification, which had the effect of resetting the delinquency clock for purposes of delinquency reporting and, critically, for the purpose of assigning the loan to a vintage cohort in BRB's CECL model. Under BRB's approach, a re-aged loan was treated as if it were a newly current loan within its original vintage cohort, rather than being tracked based on its pre-modification delinquency status.
The Staff's theory, as revealed through the line of questioning, is that these re-aged loans should have remained in their original vintage delinquency buckets for loss-rate estimation purposes within the CECL model. Under the Staff's approach, these loans — which had been delinquent prior to modification — should have continued to carry their pre-modification delinquency status for purposes of loss-rate estimation, even after the modification was executed and the borrower resumed payments. By resetting these loans as current, the Staff contends, BRB's model assigned lower expected loss rates to the 12,847 modified loans than their credit profiles warranted, resulting in a lower ACL than would have been estimated under what the Staff appears to view as the correct methodology.
The Staff appeared to be working from a detailed spreadsheet analysis of BridgeFin loan-level data, which was not shared with the witness or with counsel during the testimony. However, the questions posed by Ms. Felton and Ms. Milosevic referenced specific vintage cohorts — particularly those originated after Q2 2021 — that showed elevated delinquency when the re-aged loans were returned to their pre-modification delinquency buckets. The specificity of the Staff's questions suggested that this spreadsheet analysis was comprehensive and that the Staff had access to loan-level modification and payment history data from BRB's document production.
Ms. Navarrete's key responses to the Staff's questioning on this topic were as follows:
Consistency with Established Policy. Ms. Navarrete testified that the re-aging treatment applied to BridgeFin loans was consistent with BRB's established loan modification policy, which predated the launch of BridgeFin and had been applied across the Bank's consumer loan book for many years. She explained that the policy sets forth specific criteria that a borrower must meet in order for a modified loan to be re-aged to current status, including successful completion of a trial payment period. She emphasized that the policy was not created specifically for BridgeFin and was not adopted in response to credit deterioration, but rather was the Bank's longstanding approach to loan modifications across all consumer lending lines of business.
ACL Committee and Auditor Awareness. Ms. Navarrete testified that the re-aging treatment as applied to BridgeFin was reviewed and approved by the ACL committee as part of its quarterly governance process. She further testified that Whitfield Keane LLP was informed of the treatment during the FY 2022 audit and that the Whitfield Keane engagement team reviewed the Bank's loan modification policy, including the re-aging methodology and its effect on the CECL model's vintage-cohort assignments.
Disclosure in the FY 2022 10-K. Ms. Navarrete acknowledged that the re-aging treatment was described in the Management's Discussion and Analysis ("MD&A") section of the FY 2022 Form 10-K, but she acknowledged, in response to a direct question from Ms. Felton, that the disclosure was at a high level and did not specifically quantify the number of re-aged BridgeFin loans or the aggregate dollar amount of those loans ($236.4 million). She described the disclosure as being consistent with the level of detail provided in the MD&A disclosures of peer institutions, though she did not offer specific peer comparisons.
Regulatory Guidance. Ms. Navarrete maintained that the re-aging policy, including the treatment of modified loans as current for delinquency and CECL vintage-cohort purposes, was consistent with guidance in the OCC's Comptroller's Handbook regarding the treatment of troubled debt restructurings and loan modifications. She stated that BRB's policy was designed to align with supervisory expectations regarding the treatment of performing modifications.
Ms. Felton then turned to the quantitative implications of the re-aging treatment, posing two particularly pointed questions:
First, Ms. Felton asked whether Ms. Navarrete was aware that if the 12,847 re-aged loans were kept in their original vintage buckets — i.e., if their pre-modification delinquency status were maintained rather than reset to current — the 90-plus-day delinquency rate for the BridgeFin portfolio would increase from the reported rate of 1.72% to approximately 2.38%. Ms. Navarrete stated that she was aware of the Staff's analysis and the resulting figure but reiterated that she believed BRB's methodology — which treated the re-aged loans as current after modification — was reasonable and consistent with the Bank's established policies.
Second, Ms. Felton pressed on whether the net charge-off ("NCO") rate for the BridgeFin portfolio would increase from the reported rate of 2.14% to approximately 3.05% under the Staff's approach. Ms. Navarrete acknowledged the arithmetic of the Staff's calculation but was careful to reiterate that BRB's reported figure of 2.14% reflected the methodology that BRB believed was appropriate and that the Bank had applied consistently. She did not concede that the Staff's figures represented the "correct" NCO rate, characterizing the difference instead as a consequence of differing methodological choices regarding the classification of re-aged loans.
Throughout this segment, Ms. Navarrete was measured and deliberate in her responses. She occasionally paused before answering, particularly when questions involved the numerical implications of the Staff's alternative methodology, but her pauses appeared to reflect genuine consideration and a desire for accuracy rather than discomfort or evasiveness. Her testimony on this topic was consistent with the positions BRB has articulated in its prior communications with the Staff.
E. Materiality of Potential Understatement
Following the re-aging segment, Ms. Felton turned to questions regarding the materiality of the potential ACL understatement implied by the Staff's analysis. This segment lasted approximately twenty minutes and was a natural extension of the re-aging discussion.
Ms. Felton asked whether Ms. Navarrete was aware of BRB's internal materiality threshold used for purposes of evaluating the significance of misstatements in its financial statements. Ms. Navarrete confirmed that BRB applied a quantitative materiality threshold of five percent (5%) of pre-tax income, consistent with widely accepted materiality benchmarks in practice.
Ms. Felton then established, through questioning, the relevant figures: BRB's pre-tax income for FY 2022 was $612 million, producing a quantitative materiality threshold of approximately $30.6 million. The Staff's preliminary view of the ACL understatement — the difference between the ACL the Staff believes BRB should have reported ($180.8 million) and the ACL BRB actually reported ($143.5 million) — is approximately $37.3 million. This figure exceeds BRB's own materiality threshold by approximately $6.7 million, or approximately 21.9% above the threshold.
Ms. Navarrete testified that she did not agree with the Staff's characterization of the $37.3 million difference as an "understatement." She described it instead as a "difference in methodology" that falls within the range of reasonable estimates contemplated by the CECL framework under ASC 326. She stated: "CECL is an estimate-based standard that inherently requires management judgment. Reasonable accountants and reasonable banking institutions can and do arrive at different ACL estimates for the same portfolio based on legitimate differences in methodology. We believe our estimate was within the range of reasonable estimates and was the product of a well-governed, well-documented process."
Ms. Navarrete further testified that quantitative materiality thresholds are intended to serve as guidelines for assessing materiality, not as rigid bright-line rules, and that qualitative factors must also be considered in any materiality analysis. She did not elaborate further on this point, and the Staff did not press her to identify which qualitative factors she believed were relevant, though it is likely the Staff will revisit this issue in subsequent testimony with other witnesses.
F. Internal Controls over Financial Reporting
Ms. Felton next turned to questions regarding BRB's internal controls over financial reporting as they related to the ACL estimation process. This segment lasted approximately twenty-five minutes and covered BRB's SOX 302 and 404 certifications, the design and operation of controls around the ACL, and the existence of any internal dissent regarding the reported ACL levels.
Ms. Navarrete confirmed that she signed the SOX Section 302 certifications for the FY 2022 Form 10-K (filed February 28, 2023) and for the Q1 2023 Form 10-Q (filed May 10, 2023) and Q2 2023 Form 10-Q (filed August 9, 2023). She testified that in signing these certifications, she affirmed, among other things, that the financial statements and other financial information included in the reports fairly presented, in all material respects, the financial condition, results of operations, and cash flows of BRB as of, and for, the periods presented in those reports, and that she had evaluated the effectiveness of BRB's disclosure controls and procedures as of the end of the relevant fiscal periods.
Ms. Navarrete described BRB's internal controls around the ACL estimation process in detail. She testified that the process included the following control activities: (i) quarterly model runs by the credit-risk analytics team using current loan-level data and updated macroeconomic forecasts; (ii) independent model validation, conducted on an annual basis by the model-risk management function and periodically by external consultants; (iii) review of model output and qualitative overlay recommendations by the ACL committee, chaired by the Chief Risk Officer; (iv) CFO sign-off on the ACL before incorporation into the financial statements; (v) presentation of the ACL to the Audit Committee of the Board of Directors; and (vi) external audit review by Whitfield Keane LLP, including detailed testing of model inputs, assumptions, and methodology. She testified that each of these controls was designed to provide reasonable assurance that the reported ACL was determined in accordance with GAAP and reflected management's best estimate of expected credit losses.
Ms. Navarrete confirmed that no material weakness or significant deficiency had been identified in BRB's internal controls over financial reporting related to the ACL estimation process, either by internal audit, by Whitfield Keane LLP, or by BRB's bank regulators, including the Office of the Comptroller of the Currency (the "OCC").
Ms. Felton then asked whether any internal BRB personnel had raised concerns about the BridgeFin ACL levels or about the adequacy of the ACL estimate as it related to the BridgeFin portfolio. This question appeared designed to probe for any internal dissent, whistleblower complaints, or disagreements that could undermine BRB's position that its ACL methodology was a good-faith exercise of accounting judgment. Ms. Navarrete testified that she was not aware of any formal dissent or objection raised by any internal BRB personnel regarding the BridgeFin ACL levels. She did, however, acknowledge — and this was a point that she handled candidly and well — that the credit-risk analytics team had flagged rising delinquencies in post-Q2 2021 vintage cohorts in their routine quarterly reporting. She testified that these observations were part of the team's normal monitoring and reporting function, that they were presented to the ACL committee, and that the committee considered this information and responded by adjusting the qualitative overlays applied to the BridgeFin ACL estimate. She was careful to characterize the credit-risk team's reporting as routine analytical observation rather than a formal expression of concern about the adequacy of the ACL.
G. Communications with External Auditor
The next segment of the testimony focused on Ms. Navarrete's communications with Whitfield Keane LLP regarding the ACL methodology as applied to the BridgeFin portfolio. This segment lasted approximately twenty minutes and was led by Ms. Felton, with limited follow-up from Mr. Yuen.
Ms. Navarrete testified that Lorraine Dupont (engagement partner at Whitfield Keane) and the Whitfield Keane audit team reviewed BRB's CECL methodology, including the re-aging treatment of modified BridgeFin loans, as part of the FY 2022 audit. She stated that the audit team's review was thorough and included evaluation of the CECL model's design, the reasonableness of key assumptions and inputs, the adequacy of qualitative overlays, and the appropriateness of the Bank's accounting policies as applied to the BridgeFin portfolio. She testified that, to her knowledge, the re-aging treatment was specifically discussed with the Whitfield Keane audit team during the course of the FY 2022 audit and that the audit team did not express disagreement with BRB's approach.
Ms. Navarrete confirmed that Whitfield Keane issued an unqualified audit opinion on BRB's FY 2022 financial statements and that no audit adjustments were proposed by Whitfield Keane with respect to the BridgeFin ACL. She also confirmed that the ACL was identified by Whitfield Keane as a critical audit matter ("CAM") in its audit report, which she characterized as reflecting the inherent estimation uncertainty associated with the ACL rather than any specific concern about the adequacy of BRB's estimate.
Mr. Yuen asked follow-up questions about the timing and frequency of communications between Ms. Navarrete and the Whitfield Keane engagement team regarding the BridgeFin portfolio specifically. Ms. Navarrete testified that she participated in quarterly status meetings with the Whitfield Keane team and that the BridgeFin portfolio was a regular topic of discussion at those meetings given its size and growth trajectory.
During this segment, Ms. Felton returned to the topic of BRB's communications with outside counsel regarding the FY 2022 Form 10-K. Specifically, Ms. Felton asked Ms. Navarrete to describe the substance of a communication she had with Martin Caldwell of Caldwell Pratt & Stein LLP (BRB's securities counsel) in connection with the preparation of the FY 2022 10-K, specifically regarding the disclosure language for the BridgeFin portfolio in the MD&A section. Counsel for BRB (Victoria Chambers) instructed Ms. Navarrete not to answer the question on grounds of attorney-client privilege, as the communication at issue was a privileged legal consultation between BRB and its outside securities counsel regarding the adequacy and content of the Bank's SEC filings. Ms. Felton noted the privilege objection on the record. Mr. Yuen asked a follow-up question attempting to establish the date and participants of the communication without probing its substance, and Ms. Navarrete, after conferring briefly with counsel, confirmed that a communication occurred but declined to provide further detail on counsel's instruction. Ms. Felton did not press the issue further and moved on to the next topic.
H. Subsequent Disclosure Enhancements
In the final substantive segment of the testimony, Ms. Navarrete voluntarily mentioned — in response to a broad question from Ms. Felton about whether BRB had made any changes to its disclosures regarding the BridgeFin portfolio — that BRB enhanced its BridgeFin disclosures in the Q3 2023 Form 10-Q, which was filed with the Commission on November 9, 2023.
Ms. Navarrete testified that the enhanced disclosures included vintage-level delinquency tables that provided investors with a more granular view of credit quality by origination quarter, as well as expanded MD&A discussion of the BridgeFin portfolio's credit performance and the factors management considered in estimating the ACL for BridgeFin loans. She described these enhancements as a proactive decision by management to improve transparency for investors and analysts, consistent with evolving expectations around credit-risk disclosures in the banking industry.
Importantly, Ms. Navarrete was clear in her testimony that the disclosure enhancements were not an admission that BRB's prior disclosures were deficient or inadequate. She stated that the prior disclosures were appropriate for their time and consistent with the disclosure practices of BRB's peer institutions, and that the enhancements reflected management's ongoing assessment of how best to communicate with investors about the BridgeFin portfolio as the portfolio matured and the data available to support more granular disclosures increased.
Ms. Felton did not press aggressively on this point, but she did ask when the decision to enhance the disclosures was made and whether it was related to the commencement of the SEC investigation. Ms. Navarrete testified that internal discussions about enhancing BridgeFin disclosures began in the second quarter of 2023, before the Formal Order of Investigation was issued in October 2023, and that the timing of the enhancements reflected the natural evolution of the Bank's disclosure practices rather than a response to the investigation. The Staff may challenge this timeline in subsequent testimony or through document analysis, and we should be prepared to support it with contemporaneous documentation.
IV. Demeanor and Credibility Assessment
Ms. Navarrete was professional, measured, and credible throughout the approximately five hours and forty minutes of testimony. Her demeanor was calm and composed, even during the more adversarial segments of the examination regarding the re-aging treatment and the materiality of the potential understatement. She maintained appropriate eye contact with the examining attorneys, spoke clearly and at a measured pace, and demonstrated strong command of the relevant facts and the Bank's positions.
She was well-prepared on the factual details of BRB's CECL methodology, the BridgeFin portfolio, and the governance processes surrounding the ACL estimation. She was able to respond to the Staff's questions with specificity and confidence on the topics within her purview as CFO. Where questions probed into areas of greater technical granularity — particularly regarding model inputs, variable weighting, and the mechanics of the reversion methodology — she appropriately deferred to Raymond Hu and the credit-risk analytics team rather than speculating or providing potentially inaccurate responses. This was consistent with her preparation and reflected good witness discipline.
Ms. Navarrete was direct in defending BRB's methodology and did not appear evasive or defensive at any point. When confronted with the Staff's quantitative analysis (e.g., the increase in the 90-plus-day delinquency rate from 1.72% to 2.38% and the increase in the NCO rate from 2.14% to 3.05%), she acknowledged the arithmetic without conceding the validity of the underlying assumptions. This was an effective approach that avoided appearing argumentative while preserving BRB's position.
On the re-aging questions, she occasionally paused before answering, which appeared to reflect genuine consideration and a desire to provide accurate, precise testimony rather than discomfort or evasiveness. These pauses are unlikely to be viewed negatively by the Staff or, if this matter proceeds further, by any trier of fact reviewing the transcript.
Ms. Navarrete was careful throughout the testimony to distinguish between facts she knew firsthand — based on her direct involvement in the governance process — and facts she understood from reports, briefings, or presentations by members of her team. This is an important distinction and one that reflects good witness discipline. She consistently used qualifying language such as "I understand from Mr. Hu's team" or "as presented to me by the ACL committee" when testifying about matters that she oversaw but did not execute directly.
No inconsistencies were observed between Ms. Navarrete's testimony and the positions taken in BRB's document production or in prior communications between Calderwood & Harkness and the SEC Staff. Her testimony was consistent with the factual narrative set forth in our Wells submission planning documents and with the positions we have articulated in our interactions with the Staff to date.
V. Staff's Apparent Theory and Areas of Emphasis
Based on the testimony and the line of questioning employed by the Staff, the following observations can be made about the Staff's apparent enforcement theory and areas of emphasis.
Core Theory. The Staff's core theory, as evidenced by the testimony, is that BRB's treatment of the 12,847 re-aged or modified BridgeFin loans artificially lowered the ACL for the BridgeFin portfolio by approximately $37.3 million (the difference between the Staff's estimated ACL of $180.8 million and the reported ACL of $143.5 million), resulting in materially misleading disclosures in the FY 2022 Form 10-K and the Q1 2023 and Q2 2023 Forms 10-Q. The Staff appears to view the re-aging treatment not as a legitimate exercise of accounting judgment within a range of reasonable estimates, but as a misapplication of CECL that produced a materially understated ACL and materially overstated pre-tax earnings.
Statutory and Regulatory Focus. The Staff appears focused on potential violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 13a-1 and 12b-20 promulgated thereunder. These provisions relate to periodic reporting obligations, the requirement to make and keep books, records, and accounts that accurately reflect an issuer's transactions, and the requirement that reports contain such further material information as is necessary to make the required statements not misleading. Notably, the Staff's questioning did not suggest a scienter-based inquiry directed at Ms. Navarrete personally. There were no questions regarding intent to deceive, personal financial incentives (such as bonus or compensation tied to specific financial metrics), stock trading, or knowledge of the falsity of the reported figures. The absence of scienter-focused questions as to Ms. Navarrete does not definitively rule out fraud-based charges, but it suggests that the Staff's current focus is on non-scienter-based reporting and books-and-records violations rather than on Exchange Act Section 10(b) or Rule 10b-5 fraud claims.
Staff's Analytical Capabilities. Ms. Milosevic's questioning during the testimony indicated that the Staff has conducted a detailed, loan-level analysis of BridgeFin data obtained from BRB's document productions. The specificity of the questions — referencing particular vintage cohorts, modification dates, and performance metrics — suggests that the Staff has built or is building a comprehensive spreadsheet or database model that tracks individual BridgeFin loans from origination through modification and re-aging, and that the Staff has used this model to re-estimate the ACL under an alternative methodology that does not reset the delinquency status of re-aged loans. The Staff's access to this level of data and analytical capability is significant and indicates that we should expect similarly detailed questioning in the upcoming Chakravarti and Hu testimonies.
Range-of-Estimates Argument. The Staff did not appear to credit Ms. Navarrete's argument that the $37.3 million difference between BRB's reported ACL and the Staff's estimated ACL falls within a range of reasonable estimates under CECL. Ms. Felton's questions repeatedly framed the re-aging issue in binary terms — correct treatment versus incorrect treatment — rather than acknowledging that CECL contemplates a range of reasonable outcomes. This framing suggests that the Staff views the re-aging treatment as fundamentally incorrect rather than as a permissible but less conservative methodological choice. This is a significant point for our defense strategy, as a key element of our position is that BRB's methodology was within the range of reasonable estimates contemplated by ASC 326.
Disclosure Specificity Risk. A potential area of particular risk that emerged from the testimony relates to the level of specificity in BRB's disclosures regarding the re-aging policy for BridgeFin loans. The FY 2022 Form 10-K's MD&A credit-quality discussion referenced the Bank's loan modification practices at a general level but did not specifically quantify the number of re-aged BridgeFin loans (12,847) or their aggregate outstanding balance ($236.4 million). If the Staff views the re-aging of $236.4 million in BridgeFin loans as a known trend, uncertainty, or event that was reasonably likely to have a material effect on the Bank's financial condition or results of operations — as that standard is applied under Item 303 of Regulation S-K (MD&A) and the Commission's interpretive guidance — the absence of specific quantification could be characterized as a material omission under Rule 12b-20, which requires reports to include such further material information as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading. This disclosure argument could be pressed even if the Staff does not ultimately prevail on the position that the re-aging treatment itself was a GAAP violation — i.e., the Staff could argue in the alternative that even if BRB's CECL methodology was permissible, the Bank's failure to disclose the magnitude of the re-aging practice rendered its periodic reports materially misleading.
VI. Implications for Defense Strategy
A. Strengths Identified
The Navarrete testimony yielded several affirmative points that strengthen BRB's defense position. These should be incorporated into our ongoing strategy development and, when the time comes, into any Wells submission or settlement negotiation posture.
First, Ms. Navarrete's testimony was internally consistent, well-reasoned, and substantively strong. Her articulation of the governance process, the reasonableness of BRB's methodology, and the good-faith nature of management's accounting judgments bolsters the position that BRB's CECL methodology was a legitimate exercise of professional accounting judgment rather than an effort to evade the requirements of ASC 326. A factfinder reviewing the transcript should come away with the impression of a knowledgeable and careful CFO who took her financial reporting obligations seriously.
Second, the fact that Whitfield Keane LLP — a reputable, PCAOB-registered audit firm — reviewed the re-aging treatment as part of the FY 2022 audit and issued an unqualified audit opinion without proposing any audit adjustments to the BridgeFin ACL is a significant defense point. The auditor's concurrence with BRB's methodology (or at least its decision not to object to it) undermines any argument that the re-aging treatment was so plainly incorrect that reasonable accountants could not have endorsed it. While an unqualified audit opinion is not a complete defense to an SEC enforcement action, it is powerful evidence that BRB's approach was within the bounds of acceptable practice.
Third, the absence of any internal dissent regarding the BridgeFin ACL — no whistleblower complaints, no formal objections by members of the credit-risk analytics team, no memoranda expressing disagreement with the methodology — supports the defense position that there was no scienter and that the Bank's approach was the product of a good-faith, consensus-driven process. The credit-risk team's flagging of rising delinquencies in post-Q2 2021 vintages was routine monitoring, and the ACL committee responded to that information by adjusting qualitative overlays. This demonstrates a control environment that was functioning as intended, not one that was ignoring warning signs.
Fourth, the OCC's concurrent supervisory assessment of BRB provides additional support. The Bank's satisfactory CAMELS composite rating of 2 (under OCC Charter No. 24891) reflects the OCC's overall assessment that BRB is fundamentally sound. While a satisfactory CAMELS rating does not speak specifically to the adequacy of the BridgeFin ACL, the absence of any material supervisory findings regarding BRB's ACL methodology undercuts the Staff's position that the methodology was clearly deficient. We should consider the extent to which this point can be raised in any Wells submission, recognizing that the OCC examination and the SEC investigation apply different standards.
B. Vulnerabilities and Mitigation
Despite the overall strength of Ms. Navarrete's testimony, several vulnerabilities were identified that require attention and mitigation.
Disclosure Specificity. The primary vulnerability is the disclosure specificity issue: BRB's failure to quantify the 12,847 re-aged BridgeFin loans ($236.4 million in aggregate outstanding balance) in the FY 2022 10-K's MD&A. While Ms. Navarrete testified that the disclosure was consistent with industry practice, she did not provide specific peer comparisons to support this assertion. If the Staff pursues an Item 303/Rule 12b-20 theory based on the absence of quantified disclosure, we will need to demonstrate that BRB's level of disclosure was in line with the practices of comparable institutions.
Recommendation: The Brindoval Analytic Partners analysis being prepared by Dr. Franklin Osei should include a detailed peer comparison of MD&A credit-quality disclosures among comparable digital-lending banks and bank holding companies. This analysis should survey the FY 2022 10-K filings of a representative peer group and assess the level of detail provided regarding loan modification practices, re-aging policies, and their effects on delinquency and loss metrics. If the analysis demonstrates that BRB's disclosure was consistent with or more detailed than the disclosures of its peers, this will be a powerful point in our defense. Conversely, if any peers provided significantly more granular disclosure of modification and re-aging practices, we should be aware of that and prepared to distinguish those situations.
Materiality Threshold Exceedance. The Staff's preliminary estimate of the ACL understatement ($37.3 million) exceeds BRB's own quantitative materiality threshold ($30.6 million, representing 5% of pre-tax income) by $6.7 million. This is a fact the Staff will emphasize heavily, and it represents a genuine vulnerability. The Staff will argue that the potential understatement is not a close-call or borderline amount but exceeds the Bank's own threshold by a meaningful margin.
Mitigation: We should develop a robust argument that quantitative materiality thresholds are guidelines and screens, not bright-line rules, and that the ultimate materiality determination requires consideration of qualitative factors as well. Relevant qualitative factors that weigh against a materiality finding include: (i) the absence of scienter; (ii) the good-faith, well-documented nature of BRB's methodology; (iii) the auditor's concurrence with the methodology; (iv) the lack of any regulatory finding by the OCC; (v) the fact that the $37.3 million difference represents a disagreement about methodology rather than an identifiable error; and (vi) the fact that the difference relates to an estimate that inherently involves significant judgment. We should also evaluate whether, under SAB 99, the qualitative factors in this case could support a conclusion that the $37.3 million difference was not, in fact, material notwithstanding the exceedance of the quantitative threshold.
Staff's Alternative Calculations. The Staff's own charge-off and delinquency figures — the 3.05% NCO rate and the 2.38% 90-plus-day delinquency rate that result from reversing the re-aging treatment — are based on assumptions about how re-aged loans should be classified that BRB reasonably disputes. However, the numerical specificity of the Staff's analysis gives it an aura of precision that could be persuasive to a factfinder. We should be prepared to challenge the Staff's methodology on multiple grounds, including whether the Staff's approach is itself consistent with ASC 326, whether the Staff has appropriately considered the effect of successful modifications on a borrower's probability of default, and whether the Staff's assumptions about re-aged loan performance are supported by the actual post-modification payment history of BridgeFin borrowers.
C. Preparation for Upcoming Testimonies
The testimony of Ms. Navarrete provides critical intelligence for the preparation of the two upcoming witness testimonies in this investigation.
Naveen Chakravarti (BridgeFin Division Head) — Scheduled January 30, 2024. Based on the Staff's line of questioning with Ms. Navarrete, Mr. Chakravarti should be prepared for an intensive examination focused on the operational mechanics of BridgeFin loan modifications, the specific criteria for re-aging, the process by which borrowers were identified as candidates for modification, and the role of the BridgeFin division in initiating and executing modifications. Mr. Chakravarti should be prepared for deep-dive questions on the following topics:
• The operational workflow for processing a BridgeFin loan modification, from initial identification of a delinquent borrower through the execution of the modification agreement and the re-aging of the loan in BRB's systems.
• The specific criteria and thresholds used to determine whether a delinquent BridgeFin loan was eligible for modification and re-aging, including any minimum payment requirements, trial period requirements, and borrower eligibility standards.
• Any communications between Mr. Chakravarti (or members of the BridgeFin team) and Ms. Navarrete, Mr. Hu, or other members of BRB's finance and accounting teams regarding credit deterioration in post-Q2 2021 BridgeFin vintage cohorts.
• The 12,847 loan figure and $236.4 million aggregate balance — the Staff will certainly explore these numbers in detail and will likely ask Mr. Chakravarti whether he was aware of the magnitude of re-aging activity in the BridgeFin portfolio and whether he viewed it as noteworthy or unusual.
• Any performance metrics or dashboards that the BridgeFin team tracked with respect to the portfolio's credit quality, including modification rates, re-default rates for modified loans, and vintage-level delinquency trends.
Raymond Hu (Chief Accounting Officer) — Scheduled February 14, 2024. Mr. Hu should be prepared for an intensive examination by Ms. Milosevic focused on the technical accounting aspects of the CECL model as applied to BridgeFin. Based on the areas where Ms. Navarrete deferred to Mr. Hu during her testimony, the Staff will likely direct the following lines of inquiry to Mr. Hu:
• The specific CECL model inputs, including macroeconomic forecast variable selection, variable weighting, scenario probabilities, and the basis for the two-year reasonable and supportable forecast period.
• The methodology for calibrating qualitative overlays, including how the overlays were quantified, what data supported them, and whether they were adjusted in response to the credit-risk analytics team's flagging of rising delinquencies in post-Q2 2021 vintages.
• The interaction between the re-aging treatment and the vintage-cohort assignment process — specifically, how re-aged loans were treated in the model and what the effect of the re-aging was on cohort-level loss rates.
• Communications with Whitfield Keane LLP (Lorraine Dupont and the audit team) regarding the CECL methodology, the re-aging treatment, and the adequacy of the ACL. Mr. Hu is likely the individual who had the most detailed technical discussions with the auditor on these topics, and the Staff will want to understand what the auditor asked, what information was provided, and whether the auditor expressed any reservations.
• The credit-risk analytics team's internal analysis of BridgeFin credit quality, including any memoranda, models, or reports that documented rising delinquencies or suggested that the ACL might need to be increased.
VII. Documents of Note from Testimony
During the course of the testimony, the Staff introduced approximately eighteen (18) exhibits that were marked on the record and shown to Ms. Navarrete. The following is a summary of the exhibits, based on the Bates number ranges from BRB's document production to the SEC (the "BRB-SEC" production):
1. Excerpts from BRB's FY 2022 Form 10-K (filed February 28, 2023), including the ACL footnote (Note 6 — Allowance for Credit Losses) and the MD&A credit-quality discussion.
2. Excerpts from BRB's Q1 2023 Form 10-Q (filed May 10, 2023), including updated ACL disclosures and MD&A discussion.
3. Excerpts from BRB's Q2 2023 Form 10-Q (filed August 9, 2023), including updated ACL disclosures and MD&A discussion.
4. ACL committee meeting minutes for Q3 2022 (meeting date: October 19, 2022).
5. ACL committee meeting minutes for Q4 2022 (meeting date: January 18, 2023).
6. ACL committee meeting minutes for Q1 2023 (meeting date: April 20, 2023).
7. ACL committee meeting minutes for Q2 2023 (meeting date: July 19, 2023).
8. BridgeFin credit-quality dashboard reports — monthly reports covering the period from July 2022 through June 2023 (multiple exhibits grouped together by the Staff).
9. Internal email chain regarding BridgeFin vintage performance for post-Q2 2021 cohorts, including discussion of rising delinquency trends.
10. BRB loan modification policy document (the "Loan Modification and Re-Aging Policy"), including amendments and updates applicable during the relevant period.
11. SOX Section 302 certifications signed by Ms. Navarrete for the FY 2022 Form 10-K and the Q1 2023 and Q2 2023 Forms 10-Q.
Additional exhibits were marked during the testimony that included selected pages from BRB's credit-risk management framework documentation and supplemental schedules to the ACL committee presentations. The precise Bates numbers for all exhibits should be confirmed upon receipt of the transcript and cross-referenced with our production log.
Note: Upon receipt of the transcript, we should promptly cross-reference the exhibit identification with our document production log and privilege log to ensure that no privilege-log entries are implicated by the exhibits shown during testimony. If any documents shown by the Staff were produced from a Bates range that includes documents over which privilege was asserted, we should investigate whether there has been an inadvertent production and take appropriate steps under Federal Rule of Evidence 502(b) if warranted.
VIII. Next Steps
Based on the testimony and the analysis set forth above, the following next steps are recommended:
1. Transcript Review. Order and review the transcript of Ms. Navarrete's testimony promptly upon availability. Estimated delivery is within ten to fourteen business days. Upon receipt, the transcript should be circulated to Victoria Chambers, Howard Quinn, and Liam Donahue for review. The transcript should be c