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From Securities Regulation Daily, December 4, 2013

Fifth Third settles with SEC for improper accounting of loan losses

By Amanda Maine, J.D.

The SEC announced that it has settled with Fifth Third Bank and its former CFO over charges that Fifth Third misclassified loan losses in its commercial real estate loan portfolio. Fifth Third agreed to pay $6.5 million to settle the charges, while its former CFO agreed to pay a $100,000 penalty (In the Matter of Fifth Third Bancorp, December 4, 2013).

Background. Fifth Third Bancorp, an Ohio bank holding company, experienced substantially increasing non-performing assets in its commercial real estate loan portfolio, precipitated by the decline in the real estate market in 2007 and 2008. The company’s senior management decided to pursue a large sale of non-performing commercial loans, and eventually executed engagement agreements with two loan brokers to market and sell loans with combined balances of $1.5 billion.

Improper accounting. According to the SEC, when Fifth Third formed the intent to sell the loans, U.S. GAAP required Fifth Third to classify them as “held for sale” and to value them at fair value. However, Fifth Third instead classified the loans as “held for investment.” By classifying the loans as “held for investment,” Fifth Third avoided a $169 million impairment, the SEC alleged.

Fifth Third CFO Daniel Poston understood the relevant accounting rules, but still failed to direct that the loans be classified correctly under GAAP, according to the SEC. Poston also made statements in a Fifth Third management representation letter to auditors that were not true, given the company’s loan sale activities, the SEC alleged.

Charges and sanctions. The SEC charged Fifth Third and Poston with violating Sections 17(a)(2) and 17(a)(3) of the Securities Act and the reporting, books and records, and internal controls provisions of the federal securities laws. In settling the matter, Fifth Third agreed to pay $6.5 million and to cease and desist from committing future violations of those provisions. Poston agreed to pay a $100,000 penalty and to be barred from appearing or practicing before the SEC as an accountant for one year.

The release is No. 33-9490.

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