Pennsylvania bank holding company Malvern Bancorp and its former CFO, Joseph Gangemi, agreed to pay $350,000 and $40,000, respectively, to settle Securities and Exchange Commission charges related to financial recordkeeping and reporting, the agency said.
Between December 2017 and February 2021, Malvern kept inaccurate books and records pertaining to several large commercial real estate loans, which led to “material misstatements” in company financial reports over several quarters, according to a commission order released Tuesday.
The agency determined that Malvern violated antifraud, reporting, books and records, and internal accounting controls provisions of the securities laws. It further concluded that Gangemi, who became Malvern’s CFO in 2015, “caused” these violations. “Gangemi knew or should have known information indicating that Malvern’s accounting for the assets was incorrect,” the order said.
The enforcement action comes on the heels of the completion of Malvern’s agreement to be acquired by New Jersey-based First Bank in a stock and cash transaction valued at about $129.7 million. The deal, which closed on July 17, created a combined company with about $3.8 billion in assets.
Malvern was the holding company for Malvern Bank, originally organized in 1887 as a federally-chartered savings bank. It conducted business from its headquarters in Paoli, Pennsylvania, a suburb of Philadelphia, and through seven other banking locations.
The SEC’s order details several instances in which Malvern’s records allegedly failed to properly account for customer loan issues such as troubled debt restructuring. Ultimately, this led to financial statement revisions in the company’s amended form 10-Q for the quarter ended Dec. 31, 2019 and in its amended form 10-K for the fiscal year-ended Sept. 30, 2020.
The commission said Gangemi failed to maintain accurate records and didn’t implement effective internal controls over financial reporting.
In one case, a commercial real estate business identified as “Company A” refinanced a property through a $7.2 million loan from Malvern in July 2016, according to the order. The unnamed client had a national retailer as its sole tenant, which declared bankruptcy in March 2017.
Company A, which didn’t have any other sources of operational cash flow, tried to find a new tenant for the property throughout 2017 and 2018 but failed to do so.
After the tenant’s bankruptcy, Company A’s principals refused to continue paying on the loan without payment relief through a loan modification. Malvern then approved a 15-month interest-only loan modification in September 2017, followed by a reduced interest rate in September 2017.
Despite Company A’s financial difficulties as well as the interest rate and payment term concessions, Malvern failed, as required by SEC rules, to classify the restructuring of the loan as a troubled debt restructuring as of Dec. 31, 2017, according to the order.
“By failing to identify this significant loan as a TDR, Malvern materially misrepresented the true status of the loan,” the SEC said, adding that Gangemi “caused the misstatement.”
Malvern and Gangemi agreed to a cease-and-desist order and to pay civil penalties without admitting to or denying the SEC’s findings, the agency said.
First Bank and Malvern didn’t immediately respond to a request for comment.