Lancaster-based financial services company Fulton Financial Services has agreed to pay a $1.5 million penalty to the Securities and Exchange Commission after regulators alleged it inaccurately reported financial performance from late 2016 through mid-2017.
Fulton’s public filings inaccurately described the process that the financial services company used to value its mortgage servicing rights asset and determine the asset’s valuation allowance, SEC regulators said in an order filed Monday.
Over two quarters, Fulton allegedly departed from its stated valuation practices and maintained a $1.3 million mortgage servicing rights asset valuation allowance that was not supported by its publicly disclosed valuation process. Fulton reversed the allowance in the following quarter, which increased the company’s earnings per share one penny at a time, when it otherwise should have fallen short of analysts’ consensus expectations.
The SEC said it accepted an Offer of Settlement submitted by Fulton, under which Fulton agreed to an administrative cease-and-desist order by the SEC with respect to alleged violations of the federal securities law. The settlement doesn’t require Fulton to admit or deny the SEC’s findings.
“Fulton Financial is pleased to resolve this investigation,” the bank holding company said in an email statement to Central Penn Business Journal. “Over the past few years, Fulton has taken proactive steps to further strengthen our mortgage servicing rights portfolio valuation process, and we continue to carefully manage our internal controls and accounting practices across the company.”
In preparation for the 2016 fourth quarter close, Fulton asked one of its experts to provide a refreshed valuation report to include December, according to the SEC’s order. But prior to receiving the report, Fulton proceeded with its closing process and decreased its mortgage servicing rights valuation by $1.7 million based on its November interim report, leaving approximately $1.3 million in the valuation allowance.
The refreshed December report surprised the company with its higher than expected valuation of more than four basis points above the valuation in the November interim report. Under Fulton’s new spot value accounting policy, this valuation would have supported the reversal of the entire $3 million allowance, rather than just the $1.7 million reversal that Fulton recorded.
Fulton later solicited from its expert an “adjusted” December report with a basis point three points lower in value, although the SEC said this wasn’t supported by the company’s disclosed valuation process. By obtaining a lower valuation in the revised December report, Fulton was able to memorialize a smaller proposed but unrecorded adjustment related to the mortgage servicing rights, the SEC said.
Fulton’s earnings release for the second quarter of 2017 noted that “mortgage banking income increased $1.5 million…due primarily to a $1.3 million reversal of the valuation allowance for [mortgage servicing rights] in the current quarter,” but the press release did not disclose that the reversal was two quarters late.
“This was the only time that Fulton’s engagement with its valuation expert resulted in the issuance of a report with a revised valuation,” SEC Secretary Vanessa Countryman said in Monday’s order. “Fulton’s engagement with the valuation expert in the fourth quarter of 2016 was inconsistent with its practices in other quarters and also was inconsistent with the process described in its public disclosures.”