The Bancorp: Bad Moon Rising

The Bancorp (NASDAQ:TBBK) is a Philadelphia area bank founded in 2000 by the pioneering banker and lawyer Betsy Z. Cohen. A few bullet points from her resume:

• Second female law professor on the East Coast after Ruth Bader Ginsberg
• Founded Jefferson Bank in 1974; Sold it in 1999 for $370M
• Instrumental in financing Philly’s Walnut Street downtown revival
• Board Member – Aetna US Healthcare, Philadelphia Museum of Art, Bryn Mawr

Since inception, the bank’s Chairman has been her son, Daniel G. Cohen. A few bullet points from his resume:

• CEO of three publicly-held companies whose market values crashed due to CDO investments
• CEO, IFMI, 2010-12 when market value crashed 91%
• CEO, Alesco Financial Trust 2007-10, when market value crashed 87%
• CEO, RAIT Financial Trust, 2006-9 when market value crashed 98%

2014 was a bad year for The Bancorp as the bank was rocked by a series of surprise accounting and regulatory disclosures resulting in a 50% drop in its stock price.

TBBK data by YCharts

First there was an April 18, 2014 8-K disclosure in conjunction with the release of its 1Q14 results that “newly identified adverse classified loans”, caused a one-time addition to its loan loss reserve of $11.8 Million. The next trading day the stock dropped 14.9% from $18.60 to $15.84.

Then there was a June 10, 2014 8-K disclosure that the FDIC found that bank was in violation of the Bank Secrecy Act — namely that reloadable prepaid cards issued by The Bancorp were being used for extensive money laundering. The next trading day the stock dropped 30.3% from $16.36 to $11.40.

On December 1, 2014, there was 8-K disclosure that CEO Betsy Z. Cohen, 72, would be retiring at the end of the year.

Her son, Daniel G. Cohen, 42, remains Chairman of the Board. Four other Board members are Board members of other companies that Daniel G. Cohen has at one time controlled.

We see a “bad moon rising” for The Bancorp in 2015. We see “trouble on the way”.

In its 3Q14 10-Q, the bank announced that was discontinuing it commercial lending operations. Based on an independent third party review, it marked down the portfolio by an additional $38.9M to a fair market carrying value of $1.2 Billion:

” In addition to $44 million in the allowance for loan losses which was net against those loans, an additional $38.9 million expense resulted from the valuation to estimated sales price, which was also net against those loans. “

Here is a 3Q14 conference call exchange, as transcribed by SA, confirming the view of $82.9M as the difference between the outstanding principal and the fair market carrying value of the portfolio at that time.

“Paul Frenkiel– Chief Financial Officer

Sure. Yes, those actually are separate, so maybe the easiest, I think the way you are trying to look at it was that at the end of the second quarter we had a reserve of about $46 million. We had some activity during the quarter, so we ended up with the reserve about $44 million and $38 million was basically in addition to that.

Matthew Kelley– Sterne Agee

Got you. So we can really think about it as an $82 million write-down or 7% or 8% of the unpaid principal balance. Is that the right way to think about it?

Paul Frenkiel – Chief Financial Officer

By 38 in addition to the 44 that had accumulated over a period of many years.”

On the next to the last business day of the year, December 30, 2014, the bank issued an 8-K stating that it had sold a portion of its $1.2 Billion commercial loan portfolio:

“The sold loan portfolio had an outstanding principal balance of approximately $267.6 million, which had been adjusted on the books of the Bank to estimated fair market value in the third quarter of 2014 upon the classification of the Bank’s related commercial lending operation as a discontinued operation and the transfer of the related portfolio to “held for sale” status. As a result of the estimated fair market value adjustment, the carrying value of the portfolio, as of September 30, 2014, was $213.5 million.”

Several things about this first sale caught our eye. The first thing was the mark-to-market discount associated with this relatively small piece of the portfolio:

(267.6 – 213.5) / 267.6 = 54.1 / 267.6 = 20.2%

This was way out of line with the overall average discount of 6.5% established just two months earlier.

Second, the sale was not for cash nor to an established third-party. It was for note receivables issued by a newly created LLC with the bank itself as 49% minority partner.

We ask ourselves, “How toxic can the full portfolio really be if this is what the bank had to do to sell just a portion of it?”

Maybe, they planned on an asymmetric sequence of sales, with the very toxic piece cut out first and sold to a related party at a steep discount.

Then they would sell the remaining clean piece with a mark-to-market discount of only 3% to an established third party willing to pay cash for a clean bundle.

But if this were so, why did The Bancorp not include an explicit statement in the late December 8-K of the planned asymmetric sale sequence?

Another 8-K has been just filed by The Bancorp on January 9, 2015 reporting that Arthur Birenbaum, EVP, commercial loans has resigned, effective January 8, 2015.

Investors need to get straight answers to the following questions now or during the bank’s 4Q14 earning conference call:

• What is the overall mark-to-market discount on the remaining $900M commercial loan portfolio?
• Can the bank give assurances that the remaining portfolio is fairly valued in light of the 20% mark-to-market discount associated with the piece just sold?

Below is a spreadsheet summarizing our view of the accounting of the two transactions to set aside the commercial loan portfolio in 3Q14 and then to sell the first piece on December 30, 2014.

It also includes a “what if analysis?” as to future mark-downs of the remaining portfolio for sale

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.