Iron Throne: Kingdom — Another Failed Game Release By Netmarble

Summary:

Netmarble’s newly released game Iron Throne: Kingdom is a failure based on App Annie data.

While the stock did fall to a low of 123,000 KRW in August 2017, it has since recovered since April 2018 due to a timely 25%  investment in a Korean music label that is home to the K-Pop sensation BTS.

Once the failure of this new game become evident to investors, we believe that the stock will again test its all time low of 123,000 KRW.

Analysis

Our analysis of Netmarble’s April 2017 IPO was that it was “priced for perfection”.  While the Lineage 2 game releases have been near perfect in Korea and Japan, its release in the USA has been a bust and the release in China is on hold due to geopolitical tensions.

As a result, we predicted that Netmarble’s stock would fall 45% from its November 26, 2017 closing price of 188,500 KRW to around 103,378 KRW once the revenue impacts of the USA and China releases were fully understood by investors.

While the stock did fall to a low of 123,000 KRW in August 2017, it has since recovered since April 2018 due to a timely 25%  investment in a Korean music label that is home to the K-Pop sensation BTS

Recently, Netmarble announced a May 2018 world-wide release of another MMO game called Iron Throne: Kingdom.

Based on App Annie data, we can already tell that the game is a bust with a global annualized revenue run rate (ARR)  that will never be more that $50 Million USD.  This is a drop in the bucket for Netmarble whose 2017 revenue in the range of $2,000 Million USD.

Here are the current revenue ranks on iOS Apple Store for the Iron Throne: Kingdom:

  • USA — #177
  • Japan – #363
  • South Korea — #29

The relation between revenue and revenue rank for mobile games is a power function which we have discussed in other papers.  A top 3 revenue rank game generally translates into a ARR of $1+ Billion which was the case for Lineage II.  A top 10 game drops down severely to $ 160 ARR.

Here are the App Annie revenue rank charts for the game on iOS Apple for the USA, Japan, and South Korea.

iOS USA — revenue rank 177 on June 4, 2018

iOS Japan – revenue rank 262 on June 4, 2018


The Bancorp (TBBK): Another “Extend and Pretend” Loan To Avert a 1Q 2018 Loss

Postscript: June 29, 2018

The following sequence of events revolving around a single sale of a note made to a now bankrupt LLC is indicative of the shady way The Bancorp (TBBK) had handled the disposition of its commercial loan portfolio set aside as a discontinued operations three and a half years ago.

First, on April 27, 2018, The Bancorp announced that it had reached an agreement to sell a construction loan note due from a now bankrupt LLC.  The new buyer agreed to pay the bank the full principal of the loan, but this offer was likely made possible by the fact that the bank financed the purchase by taking new notes from the buyer.  In making the announcement, the CEO Damian Kozlowski said

“There was a lot of interest and value in the property”

implying that they did their due diligence and this was the best deal they could get.

Then, less than a month later on May 16, 2018, the bank abruptly announced in an 8-K the termination of the agreement.

Now, a month later on June 29,2018,  two days before the end of its 2Q18, the bank announced once again the sale of the note.  But,  this time the buyer paid all cash without bank-financing, but bought the note at a $1.9 Million mark-down from its principal, meaning the bank would be taking an equivalent $1.9 Million loss on sale.

Was this latest buyer involved earlier?  What might have changed in the last month to induce this new buyer to pay all cash?

Postscript: May 17, 2018

After The Bancorp’s annual shareholder meeting on May 16, 2018, the company filed a  Form 8-K announcing the termination of the loan discussed at length in this paper.

We can can only speculate that it was the new buyer who got cold feet and backed out, given the spate of lawsuits filed by lawyers representing Chinese EB-5 investors .

Below is the announcement.

The Company reports the termination of the previously-announced sale of a $36.9 million non-performing loan, which is collateralized by a hotel under construction and a parking lot in Florida. The loan became delinquent in the first quarter of 2018 and the borrower, a development corporation, subsequently declared bankruptcy. Based upon an independent first quarter 2018 appraisal, the loan to value is approximately 80% on an “as-is” basis, with personal guarantees of certain of the borrower’s principals.  The Bancorp Bank, the Company’s wholly-owned subsidiary, is pursuing collection and the Company currently believes that there will be no loss of principal.

 

Summary (originally published on May 2, 2018)

On March 7, 2018  two Florida LLCs filed for Chapter 11 bankruptcy to stave off foreclosure by The Bancorp (TBBK) on a $38 Million construction loan for a hotel in Ft. Lauderdale.

In an April 8, 2018 paper, we predicted that the bank would show a loss on its 1Q 2018 financials based on our estimate of an additional 20% mark-down of the troubled hotel construction loan.

However, literally “at the 11th hour” on April 26, 2018 on the night before TBBK announced 1Q2018 earnings, the bank signed a purchase agreement to sell the troubled loan with no loss due generous bank-financing coupled with a pre-packaged bankruptcy that subordinated other lenders to the LLC.

These other lenders were 60 Chinese investors contributing $500,000 each to gain priority status for a permanent residency visa under the controversial EB-5 program.

The new loan is still troubled due to uncertainty as to how much money is needed to complete the hotel plus lawsuits filed on behalf of the now subordinated Chinese EB-5 lenders.

As we have been saying in various papers over the past four years, The Bancorp still has continuing problems with its discontinued operations.

Disclosure

We have received no remuneration for this paper. We have never received any remuneration for any of our 6+ papers about The Bancorp’s “continuing problems with its discontinued operations.”  

Our financial analysis is often directed toward deceptive accounting practices of corporations.  But, it is against our nature to talk to, or work with opportunistic lawyers suing corporations.

We do not currently have a position in the Bancorp’s stock and do not intend ever to take a position in the stock.   Information in this paper, including forecast financial information, should not be considered as advice or a recommendation to investors or potential investors in relation to holding, purchasing or selling securities.

 

A Recap of The Bancorp’s Continuing Problems

The Bancorp (NASDAQ: (TBBK) is a publicly-held Philadelphia regional bank with a diversified loan portfolio.  It is also known for being one of largest issuers of reloadable prepaid debit and gift cards in the country.  

On October 31, 2014, The Bancorp announced that it was discontinuing its $1.2 Billion commercial lending operation.  It set aside this portfolio on its balance sheet, claimed it was marked-to-market, and that it was actively seeking buyers.  Since that announcement, the bank has had considerable trouble selling off the most troubled segments.

We have written a number of papers since early 2015 detailing “continuing problems with its discontinued commercial loan operations.” There have been two basic points we have tried to make:

  • The portfolio was not fairly marked initially because “fairly marked assets sell fairly quickly.”
  • Once the bank began to take additional markdowns, the hits to equity brought it close to going below the Dodd-Frank standard of a “well-capitalized bank.”

A full recap of The Bancorp’s problems can be found in our paper  “The Bancorp: ‘An Extend and Pretend’ Loan Operation That Will Never End”

 

The Bancorp’s Problems Continue into 2018

On March 7, 2018  two Florida LLCs filed for Chapter 11 bankruptcy to stave off foreclosure by The Bancorp on a $38 Million construction loan for a hotel in Ft. Lauderdale.

The unfinished Las Olas Ocean Resort at 550 Seabreeze Boulevard in Ft. Lauderdale, Florida.

We presented a detail account of this problem loan in our April 8, 2018 paper The Bancorp (TBBK): Will a Florida Hotel Loan Default Ruin Its 1Q18 Financials?

In that paper, we predicted that the bank would show a loss on its 1Q 2018 financials based on our estimate of an additional 20% mark-down of the troubled hotel construction loan.

After the market closed on Thursday April 26, 2018, what actually happened was that TBBK reported net income of $14.1 Million with no apparent negative effect from its discontinued loan operations in general nor from the troubled hotel construction loan in particular.

Based on summary financials, TBBK’s stock soared when the market opened on Friday April 27th…for the first hour.

After that,  the stock began to fall from an intraday high of $11.60 to close at $10.96 for a 5.8% decline.  The next day another 5.3% decline was tacked on.

 

What had happened was that institutional investors did not like what they heard on the call or read about a day later when the transcripts of the call were published on-line.

 

TBBK’s 1Q2018 Conference Call and Press Release

CEO Damian Kozlowski started the April 27th conference call, proudly claiming “..the first quarter was a great start to a new year”.   (The conference call has been transcribed and made available by Seeking Alpha.)

This statement was certainly justified given the summary financials disclosed the night before in a press release indicating a positive net income of $14.1 including a small net positive income of $156,000 from the discontinued operations.  

But, then CEO Kozlowski unexpectedly announced that a purchase agreement had been signed for the troubled loan collateralized by the unfinished hotel.

This was a quick sale all the way around —  just two months after the bank foreclosed and just one month after the borrower filed for bankruptcy. (See timeline below from our previous paper) :

 

 

CEO Kozlowski even revealed that the purchase agreement was signed just the night before,  just in time to deflect any concerns about the impact of the troubled loan on future profits.

“Last night, we signed a purchase sale agreement for the full principal amount and that transaction should close this quarter. So that’s good news on the credit side.”

“There was a lot of interest and value in the property. We are glad to in the last moment before we had this call to have a purchase sale agreement signed.”

Later on in the conference call,  CEO Kozlowski gave a rather confusing answer to an analyst’s follow-up question about the bank-financing of the loan sale.  

Matthew Breese

Understood. Now that’s very helpful. Okay. And then the hotel property with the purchase agreement, what was the size of that?

Damian Kozlowski

$38 million. Yes, there is a big loan in discontinued. We are working with the purchaser, so what will happen is about 18 million will come off, we will provide credit and that credit is not only going to be backed by all the collateral, but also additional guarantees by the purchaser. So it’s going to be a safe loan. We will go down about 13 million and then we will have a bridge loan in place for the acquirer if that will be extremely low risk.

Matthew Breese

Okay. 38 out of discontinued and then?

Damian Kozlowski

I’m not sure where you will put the 25 million, but the delinquency will end. So you will see that come off. You will see it go down by approximately 13 million and then we will have a new loan. I think it probably will be booked in discontinued, but it will be a safe and sound, it will be we believe a very safe loan.

It’s only up to a year, it’s only as a combination for them to finish and reposition the property. The people who are buying the property are extremely experienced and have great knowledge of the marketplace and knowledge of the hotel industry and they are and we are very excited and so is the town I think of Fort Lauderdale that they have decided to build the property.

Matthew Breese

Okay. And so that in combination with the mall, and we are looking at over the next six months potentially something like a 70 million coming out of discontinued right?

Damian Kozlowski

Well, yes 15 from the loan, 37, 38 from the hotel.

Matthew Breese

Okay, okay. Sorry my numbers are a little off there.

 

Reconstructing The Loan Financing and Cash Requirements of New Borrower

Based on the conference call exchange quoted above, here is how we saw the agreement:

Why would someone pay full value for this loan to a bankrupt LLC?  For one, it was completely financed by the bank.  But, more importantly, it turns out that the LLC and The Bancorp negotiated a pre-packaged bankruptcy filing that subordinated $30 Million in investments from other lenders.

This comes from a post by Vernon Litigation group representing those other investors.

Besides the $50 Million loan from The Bancorp less $13 Million unfunded balance, the bankrupt LLC received, and presumably already spent an additional $30 Million from so called EB-5 Chinese investors.  The EB-5 program gives priority status for immigrants applying for permanent residency visas if they invest at least $500,000 in a U.S. jobs creation project.

The Vernon Litigation Group found court documents indicating that the LLC bankruptcy was pre-packaged with clauses that “would subordinate or eliminate the debt owed to EB-5 investors”

Here is the full explanation:

“Perhaps the most troubling issue at hand, according to the Court Documents filed in Florida District Court last week, is the allegation that the EB-5 project principals Ken Bernstein, Eugene Kessler, and Jack Kessler allegedly proposed a plan to eliminate the investment made by foreign investors. Specifically, the 550 Seabreeze project principals allegedly sought the Lender’s support for a pre-packaged bankruptcy that would subordinate or eliminate the debt owed to EB-5 investors. In other words, under this plan allegedly proposed by the principals, investments made by the foreign investors through the EB-5 project could be effectively erased.”

Below is our estimate of the cash needed by the new borrower to finish the estimated 20% remaining to complete hotel,  and to complete the bankruptcy proceedings including a settlement with the now subordinated EB-5 investors.  The estimate also includes the payoff of a reportedly outstanding $5 Million construction lien.

 

An Estimate of Future Losses on TBBK’s  Discontinued Operations

Based on its 1Q18 financials, the Bancorp can be expected to produce a quarterly net profit on continuing operations of around $14 Million.

To his credit, CEO Kozlowski has introduced a level of transparency to the quality and accumulated markdowns of loans remaining in its discontinued operations.  Below is our summary of the lastest disclosure found at the bottom at TBBK’s 1Q18 financial PR referenced earlier:

 

 

 

 

 

 

 

 

 

 

 

At the very end of the 1Q18 financial PR, the bank was forthright in disclosing early on a new problem loan:

(1) Performing discontinued loans included a $17 million loan which was delinquent 60 days as of March 31, 2018. The loan is secured by multiple commercial real estate properties which cumulatively have a 95% loan to value.

Despite an ethic of transparency brought to the bank by CEO Kozlowski in mid-2016, we still question whether TBBK has adequate reserves to cover future loan delinquencies followed by borrower bankruptcies. We believe the bank when it says that current markdowns are according to GAAP.  But normal GAAP markdowns might not be sufficient to cover future markdown on the garbage left.

The bank has spent the last four year selling off the best pieces to other banks in the Mid-Atlantic region. In 2Q15, loans totaling $150 Million were “cherry-picked” by the Cape May Bank, NJ ($102M) and another unidentified bank.  In 3Q16, a loan package of $65 Million was “cherry-picked” by the First Priority Bank, Malvern PA.  

The rest no bank would touch without requiring The Bancorp to take a considerable loss on sale which would jeopardize their status as a “well-capitalized” bank per Dodd-Frank.

In addition, at least $300 Million in loans have come off the books as borrowers with low loans to values have been able to refinance at lower interest rates at other banks. What remains are likely “underwater” loans (loans to value > 100%) and “extend and pretend” loans featuring interest only payments with a large balloon payment at the end.

We estimate below that over the next two years, there might be as many as three quarters where TBBK would have to book additional markdowns whose size would cause an overall loss on their quarterly P&L.  

 

During the 3Q16 conference call, the new CEO Damian Kozlowski sought to reassure rattled analysts by claiming,

“We believe this (markdown) is not systemic. We believe this is a one-time item.”

At the end of this unusually long and testy 4Q16 conference call with analysts (a first!), CEO Kozlowski wearily pledged,

“I want to wind it down as quickly as possible…”

The year 2016 was a bad for investors in TBBK (see chart below) as the new CEO broke through the denial and booked additional markdowns.

Obviously, the CEO must have received a lot of criticism from the Board.  Maybe the criticism got to him as there were no major additional markdowns in 2017 and the stock more than doubled.

 

We do not believe that the mid-2016 Damian Kozlowski would have allowed the troubled loan sale to be rushed through at literally “the 11th hour” to avoid concerns about possible markdowns.  

He must be worn down with the clean-up of the “extend and pretend loan operation that will never end”.  

He must be tired of the “test the limits of GAAP” ethics of TBBK’s  Chairman Daniel G. Cohen and his cronies that make up a majority of the Board.  (See our accounting paper The Bancorp: A Test for Post-Enron GAAP)

 He is too good of a bank executive to be stuck dealing with problems created before his arrival.  It’s time to GET OUT!!!

 


MZ (Machine Zone) and Its Satori Platform

Satori® – Towards a P2P Crypto-Economic Platform

 

Towards A Crypto-Economic Market Design: Discrete-Time, High Frequency, P2P

 

Machine Zone (MZ): A $10 Billion Dollar Unicorn in the Making

 

Edge Computing Use Cases for MZ’s (Machine Zone) Platform

Machine Zone and The Perversity of Unicorn Lists

 

Machine Zone (MZ): A $4 Billion Unicorn That Walks the Walk

 

Machine Zone: IPO or What?


The Bancorp (TBBK): Will a Florida Hotel Loan Default Ruin Its 1Q18 Financials?

Postscript: May 18,2018

Literally “at the 11th hour” on April 26, 2018 the night before TBBK announced 1Q2018 earnings, the bank signed an agreement to sell a troubled Florida hotel construction loan with no loss due generous bank-financing coupled with a pre-packaged bankruptcy that subordinated EB-5 lenders.  This last minute sale avoided the a 1Q 2018 loss that we predicted when this paper was first published on April 8, 2018

Then on May 16, 2018, The bank issued an 8-K announcing that the purchase agreement for the sale of the loan has been terminated.   We can can only speculate that it was the new buyer who got cold feet and backed out, given the spate of lawsuits filed by lawyers representing Chinese EB-5 investors .

Summary (originally published April 8, 2018)

The Bancorp still has continuing problems with a discontinued commercial loan portfolio first set aside on its balance sheet over 3 years ago.

The bank will likely book additional markdowns on a $37 Million loan made on a troubled Ft. Lauderdale hotel construction project with the developers finally filing for Chapter 11 bankruptcy protection in March 2018.

We estimate this additional markdown at $7.4 Million — sufficient to cause an overall loss for the bank when it reports its 1Q18 financials late in April 2018.  On the other hand, Wall Street analysts are forecasting a profit for TBBK averaging $.18 / share  or a profit of $10 Million.

 

Disclosure

We have received no remuneration for this paper. We have never received any remuneration for any of our 6+ papers about The Bancorp’s “continuing problems with its discontinued operations.”  

Our financial analysis is often directed toward deceptive accounting practices of corporations.  But, it is against our nature to talk to, or work with, opportunistic lawyers suing corporations.

We do not currently have a position in the Bancorp’s stock and do not intend ever to take a position in the stock.  Information in this paper, including forecast financial information, should not be considered as advice or a recommendation to investors or potential investors in relation to holding, purchasing or selling securities.

 

Introduction

The Bancorp (NASDAQ: (TBBK) is a publicly-held Philadelphia regional bank with a diversified loan portfolio.  It is also known for being one of largest issuers of reloadable prepaid debit and gift cards in the country.  

On March 7, 2018  two Florida LLCs filed for Chapter 11 bankruptcy to stave off foreclosure by TBBK on a $37 Million construction loan for a hotel in Ft. Lauderdale.

Note to analysts privileged to be in on TBBK’s quarterly conference calls:

  • Frank Schiraldi – Sandler O’Neill
  • William Wallace – Raymond James

Ask CEO Damian Kozlowski why a Philadelphia area bank has a history of making bad loans in Florida — this construction project in Ft. Lauderdale and the The Fashion Square Mall in Orlando, Florida discussed later)

During 2017, TBBK put together a string of four straight quarters of profits before deferred tax adjustments, largely because of no new material write downs on loans in its commercial loan portfolio set aside in late 2014 as a “discontinued operation.”  

CEO Damian Kozlowski stated in TBBK’s 4Q17 conference call :

While we may continue to have some gains or costs to resolve some of these credits, we believe that these portfolios are correctly marked, and that these adjustments will not significantly adversely impact our operating performance.

The purpose of this paper is to show that CEO Kozlowski is wrong.  TBBK once again has “continuing problems with its discontinued operations” that very likely will have a significant adverse impact on its 1Q18 financials.

 

The Timeline of the Las Olas Ocean Resort Loan

On January 25, 2018, The Bancorp (TBBK) filed foreclosure papers on two real estate LLCs in Florida Southern District Court.  

On March 7, 2018  the Florida LLCs filed for Chapter 11 bankruptcy protection to stave off foreclosure.

The Bancorp originated the loan in 2013 for $50 Million for the construction of a 12 story hotel called the Las Olas Ocean Resort at 550 Seabreeze Boulevard in Ft. Lauderdale, Florida.  This loan was part of the real estate loan portfolio set aside in late 2014 as a “discontinued operation.”  

Five years after the loan origination, the hotel was still unfinished and the loan balance was a reportedly $37 Million.

Below is a timeline of this loan.  At one time, we thought that the bank should have disclosed the January 25, 2018 foreclosure filing as a “subsequent event” on its FYE 2017 10-K filed in March 23, 2018.

In any case, we would be totally surprised if the bank failed to make special mention of this loan when it reports its 1Q18 financials sometime in late April 2018.

 

The South Florida Real Estate News  disclosed that financing for this hotel included $30 million in financing from Chinese investors via EB-5, a controversial Federal government program that fast-tracks 10,000 immigrant visas requests in return for at least $500,000 in qualified, job-creating investment

According to the publication, the project suffered numerous delays due to zoning problems and was unfinished at the time of the foreclosure…

“including have to wait nine months for a Broward County approval of architectural and engineering plans. Another six-month delay was in order to comply new Federal Emergency Management Agency flood plain requirements.”

The publication also reported that the lawsuit alleged that the developers

“… failed to finish the resort by its planned March 2017 completion date, failed to make its December 2017 loan payment…,”

The Unfinished Las Olas Ocean Resort in Ft. Lauderdale, Florida.

 

 

 

 

 

 

 

 

 

The Bancorp’s Continuing Problems with Its Discontinued Loan Portfolio

On October 31, 2014, The Bancorp announced that it was discontinuing its $1.2 Billion commercial lending operation.  It set aside this portfolio on its balance sheet, claimed it was marked-to-market, and that the bank was actively seeking buyers.  Since that announcement, the bank has had considerable trouble selling off the most troubled segments to third-parties.

We have written a number of papers since early 2015 detailing “continuing problems with its discontinued commercial loan operations.” There have been two basic points we have tried to make:

  • The portfolio was not fairly marked initially because “fairly marked assets sell fairly quickly.”
  • Once the bank began to take additional markdowns, the hits to equity brought it close to going below the Dodd-Frank standard of a “well-capitalized bank.”

A full recap of The Bancorp’s problems can be found in our  “The Bancorp: ‘An Extend and Pretend’ Loan Operation That Will Never End”

Throughout 2016, The Bancorp’s (TBBK) stock suffered a series of double digit declines on the day of quarterly earnings announcements dominated by new revelations about defaulted loans followed by foreclosure filing by the bank followed by bankruptcy by the borrower.   

In 2Q16,  it was the disclosure of a bad $30 Million loan to the owners of The Schuylkill Mall in Frackville, PA).  In 4Q16, it was the disclosure of a bad $42.2 Million loan to owners of  The Fashion Square Mall in Orlando, FL

Since a low of $5.01 per share on the day of the announcement of its 4Q16 and full year FY16 results in early February 2016, the bank’s stock has risen 119% to close at $10.99 a share on March 15, 2018.

In our opinion, this rise is largely due to an absence of new revelations about its discontinued loan portfolio rather than any fundamental improvement in its continuing operations.  

 

An Estimate of the Impact of $37 Million Loan Default on 1Q18 Financials

First, a single loan default, and subsequent foreclosure on a borrower who, in turn files for Chapter 11 bankruptcy protection, normally does not have a material impact on publicly-held bank’s quarterly earnings.

But, we think that in this particular loan default will have a material impact on 1Q18 earnings due to a combination of

  • A history of the TBBK under-reserving for its discontinued loan operations, and
  • A history of quarterly earnings from continuing operations coming in around $7 Million — tepid for a bank with $4+ Billion in assets.

First, we need to mention that there are two pieces to the bank’s discontinued loan portfolio.  The Bancorp peeled off one piece at the end of 2014 to an unconsolidated entity call Walnut Street LLC.  We have questioned TBBK’s election not to consolidate this LLC in our September 2016 paper The Bancorp: A Test for Post-Enron GAAP.

The other piece TBBK set aside on its balance sheet as a discontinued operation.

It took TBBK two full years to provide real color on the relative toxicity of the two pieces.  Even this was buried at the end of a press release announcing its 4Q16 results in February 2017.  The Bancorp finally disclosed how toxic unconsolidated Walnut Street LLC portfolio was relative to what was kept on the books.

Furthermore,  GAAP allows The Bancorp to value the two portfolios differently. For the portfolio still on its books, TBBK uses mark-to-market accounting with quarterly updates. The accounting is entirely different with the off-balance sheet Walnut Street LLC.

The LLC itself uses mark-to-market accounting internally per GAAP.  But because the LLC is unconsolidated and overwhelming financed by notes taken back by The Bancorp,  TBBK uses note valuation based on cash flow to account for the LLC’s portion of the loan portfolio. This gives them more of a cushion in accounting for changes in loan performance.

Below is our spreadsheet comparing the markdown of the two portfolios.  A more extensive comparison of the two portfolios can be found of in our 2016 paper  “The Bancorp: ‘An Extend and Pretend’ Loan Operation That Will Never End”.

The Bancorp has a history of  late accounting for losses on its discontinued loan portfolios. In 2016, TBBK P&L took a series of material hits to its P&L totalling $77.2 Million. 

While the bank does not name the specific loans associated with  markdowns / note write-offs, we believe that a majority of the $77.2 Million came from two loans where the borrowers eventually declared bankruptcy:

We believe that the majority of a 2Q16 markdown / note write-off of $31 Million came from Schuylkill Mall loan.  It was first significant loss the bank recognized since the bank first announced the discontinuation of commercial lending operations on October 30, 2014.

During the 2Q16 Conference Call, one analyst quipped, “.. maybe you guys ripped the Band-Aid off this quarter..” and went on to say he was unsure whether these losses were a one-time event or the beginning of a more forthright examination of the valuations of these troubled loan portfolios.

The bank’s history of catch-up loan reserve accounting support our belief that the bank will have to make additional mark-down in 1Q18.  Even with our estimated 41% markdown already booked on the Las Olas property, we think there will have to be more taken.

To be fair, the Las Olas hotel with its unfinished interior is still  salvageable and located on prime waterfront real estate whereas the Schuylkill Mall was not salvageable and torn done in 2018. The Orlando Fashion Mall was located in a prime area, but requires extensive redevelopment as a hotel and office complex.  

The figure for the estimated markdown at the time of the default — 41% — comes from the bank’s 4Q16 disclosure on average markdown of loans in its discontinued loan portfolio.

The figure for the additional markdown due to the default and subsequent Chapter 11 bankruptcy — 20% — is consistent with what we think TBBK took after 2016 Schuylkill Mall and the Fashion Square Mall loan defaults, foreclosures and subsequent bankruptcies.

 

 

 

 

 

 

 

 

 

 

Below is the history of TBBK’s net earnings for the past two years broken down into three components

  • Continuing operations less returns from unconsolidated Walnut Street LLC
  • Discontinued operations including markdowns
  • Returns on notes receivable from the unconsolidated Walnut Street LLC

Based on normal net income from continuing operations in 2016, we estimate 1Q18 net income from continuing operations at $7 Million.  Couple that with our estimated $7.4 Million additional markdown of the Las Olas property, we arrive at a $400,000 loss for TBBK in 1Q18.

Wall Street analysts currently are forecasting a profit for TBBK in the neighborhood of $10 Million.

This loss will be the first for TBBK in 4 quarters.

Given the toxicity of the loans remaining, we stand by our 2016 paper title:


The Facebook – Google Duopoly — Where They Differ?

Summary:

Facebook and Google differ fundamentally in the degree of adtech vertical integration.  Facebook only has a significant internal supply side platform (SSP).  Google has a significant SSP, ad exchange, and a demand side platform (DSP).

Facebook recognizes that its supply of ad impressions has reached a ceiling due to user annoyance of ads in their feeds.  With supply now inelastic within Facebook, there are three options open to increasing revenue — quantity times unit price.

  1. Get into selling impressions outside its “walled garden” which it has done through a retargeting business.
  2. Assert its pricing power as a duopolist and just “shift up the supply curve” (i.e. limit ad impressions).
  3. Work to “shift up the demand curve” of advertisers by sharing user data with independent DSPs to improve ad buy ROI resulting in a willingness to pay higher prices.

Option 2 exposes Facebook to antitrust lawsuits.  Option 1 and 3 are promising, but it relies on a sharing of user data with independent demand side platforms (DSPs) which has become problematic due to the Cambridge Analytica debacle.

We make the case for Option 3.

 

The Facebook – Google Duopoly

The intermediate market for digital ad impressions is now dominated by the Google – Facebook duopoly.  In 2017, the duopoly’s total share of ad impression sales was estimated at 60.4% (see below).

In the fast growing digital native ad subset market, the duopoly’s share rose to 91.9%.

The data above largely reflects ads embedded in mobile and PC content.  The market for real time ad impressions embedded in ad-supported streaming TV — as opposed to subscription-supported Netflix and Amazon Prime — is just beginning.

 

The Intermediate Market for Digital Ad Impressions

On the extreme demand-side of the digital ad impression market are advertisers wishing to buy ad impressions and on the extreme sell-side are content publishers selling ad impressions.

Between advertisers and publishers is an adtech intermediate market. It consists of supply-side platforms (SSPs) also dominated by Google and Facebook with Amazon being a fast riser in the SSP space.

Next comes ad exchanges where transactions and pricing takes place increasingly via real-time auctions.  Google dominates with DoubleClick AdExchange. Facebook launched its own FBX in 2011 but let it slowly die over the next three years.

Next comes demand side platforms (DSPs), which is the most competitive segment.  Google has its own internal DSP called DoubleClick Bid Manager which dominates ad buying both on Google’s “walled garden” of search and on its own subsidiary YouTube.

Facebook has an internal DSP called Facebook Ad Manager useful to small and medium business wishing to buy ads within its eponymous “walled garden.” But, Facebook seems to be holding back from customizing its internal DSP to cater to large advertisers with unique needs.

Because of the publicity surrounding Cambridge Analytica, Facebook is under enormous pressure to pull back all the ways its allows third parties to access its user data.  We think it would be “throwing out the baby with the bathwater” if Facebook were to pullback of all adtech — SSP, AdEx, and DSP — within its “walled garden”.

Rather, it needs all the help it can in filtering out “lemons” ala George Akerlof’s iconic economics paper “A Market for Lemons”.  It is in Facebook’s own interest to foster independent DSP’s with “clean room” access to data (see below).

 

The Focus of Antitrust Concerns

The sheer scale of the Google – Facebook duopoly is the current focus of antitrust concerns. But, the extent of the duopoly’s vertical integration —  owning the full vertical stack of businesses from content publishing to a SSP to an ad exchange to a DSP — needs to be analyzed in much greater detail by adtech experts for potential antitrust violations.

Antitrust concerns so far has focused on the supply side with the most recent flare-up being Facebook’s decision to limit third-party news feeds inserted into the social graphs of Facebook users.

This supply-side focus on content is understandable as such developments hurt the job prospects of the very paid  tech and business writers [ not us 😉 ] who write about Google and Facebook.

In contrast, we think a recent development on the demand-side  deserves more attention. This is because it signals that Facebook is seeking to deflect antitrust concerns by actively assisting in the development of strong, independent DSPs.

 

Facebook’s Effort to Foster Strong Independent DSPs

In December 2017, TechCrunch published an article describing how an internal Facebook team of 100 engineers has been working with big advertisers to develop their own customized DSPs.

Right off the bat, this revelation is a clear sign that Facebook today does not intend on repeating the anticompetitive tactics used by Microsoft in the mid 1990s.  Back then, Microsoft used its control over the dominant Windows PC operating system to throttle the ability of users to replace Microsoft’s own default browser with a popular third-party browser developed by Netscape.

Notwithstanding the antitrust motivation for supporting independent DSPs, Facebook’s initiative is good from a pure business perspective.  Facebook realizes that improving ROI on purchased ad impressions via reduced information asymmetry translates into a willingness by advertisers to make higher bids for “peaches” instead of “lemons” ala George Akerlof’s iconic economics paper “The Market for Lemons”.

Indeed, we see the current digital ad impression market as the “mother of all markets for lemons”  including the following list of extreme conditions for markets with information asymmetry between sellers and buyers:

  • zero marginal cost on both sides creating lemons and traps
  • dueling artificial intelligence (AI) on both sides morphing sell-side lemons and buy-side traps
  • real-time auctions
  • low latency rendering and fill of ad after purchase of impression
  • double interrelated information asymmetry (see below)

 

Facebook’s Options For Increasing Revenue

Facebook recognizes that its supply of ad impressions has reached a ceiling due to user annoyance of ads in their feeds.  With supply now inelastic within Facebook, there are three options open to increasing revenue — quantity times unit price.

  • Get into selling impressions outside its “walled garden” which it has done through a retargeting business.
  • Assert its pricing power as a duopolist and just “shift up the supply curve” (i.e. limit ad impressions) which it in effect has done by limiting outside news feeds.

Facebook Option 2: Shift up the Supply Curve

  • Work to “shift up the demand curve” of advertisers by working with independent DSPs to improve ad buy ROI resulting in a willingness to pay higher prices.

Facebook Option 3: Shift up the Demand Curve

Facebook is signaling that it is giving option 3 a try.

Here is a great quote from an April 2017 adExchanger article on digital ad prices as a reflection of quality and the opportunity for Facebook to receive higher prices — shift up the demand curve  — from advertisers and agencies using more discriminating DSPs.:

We buy it cheaper” used to be the lead differentiator in a pitch. Today, agencies that lead with “We can buy digital cheaper” have a sign taped to their back that says, “We buy lots of fraud.” Low prices in digital media are not only no longer a badge of honor, they’re a warning sign.

Here is a quote from the TechCrunch article on the ROI improvement coming from DSPs built with the assistance of the Facebook engineering team:

Facebook says that on average, clients working with the solutions engineering team see their return on ad spend improve by 100 percent.

The article mentioned that after working with the Facebook team to improve the performance of its own internal DSP,  the mobile game company MZ (formerly Machine Zone), has spun off its internal DSP as an independent business called Cognant ®.

It should be noted that even before the spin-off, MZ was already the largest “direct response” advertiser in the world and likely on Facebook itself.

As Facebook’s largest direct response advertiser, MZ was the likely first recipient of access to Facebook user data located in “clean rooms” on Facebook servers.  Here is a February 28, 2017 description by AdExchanger of the linkage:

Google and Facebook are each responding to advertiser demands for more data. Facebook does data-sharing deals on the DL with large marketers that push for it.

In so-called “clean rooms,” for example, advertisers can compare their first-party data with impression-level Facebook campaign delivery data using laptops that have never touched the internet. Facebook also allows certain large advertisers to create a private instance on its server to run advanced analytics.

We would expect Google to lag behind Facebook as Google’s supply of ad impressions is more elastic.  Google can increase revenue via increasing the supply of impressions especially on its YouTube subsidiary.

Facebook has no room in its “wall-garden” for more ad impressions. It will be interesting to see how much Facebook derives revenue from its retargeting business outside its “walled garden.”  Otherwise, the only way Facebook can increase revenue is by working to improve ROI on the demand side and “shift up the demand curve.”

 Facebook antitrust lawsuits will inevitably dwell on ad price trends as measured by cost-per-click (CPC).  Consider the following graph showing that Facebook’s CPC  rose 136% in the first six months of 2017.

How much of the above trend was due to Facebook asserting it’s pricing power and how much of that trend was due to other factors?

For example, the upward trend could be due in part to a secular improvement in ad ROI delivered by independent DSPs with help of Facebook supplied application programming interfaces (APIs), thus reducing information asymmetry on the part of buyers.

Of course, it takes more than API hooks for a DSP to deliver significant improvements in ad ROI.  It takes a DSP that can build a sophisticated real-time programmatic bid engine and a real-time predictive analytics platform that feeds off Facebook-supplied user data and spits out bids with improved click-through rates.

In sum, Facebook has deflected the antitrust case against it by assisting independent demand side platforms (DSPs) like MZ’s (Machine Zone’s) Cognant ® to build strong countervailing platforms.  

 At the same time, working with independent DSPs to improve ad buy ROI and a willingness to pay higher price is a way out of its conundrum of growing revenue while limiting ad impressions in its “walled garden”.