Categories
Crypto Economics

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!!!

 

Categories
Crypto Economics

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:

Categories
Crypto Economics

The Bancorp Is Having An “Enron Moment” With Its Unconsolidated LLC

An Enron moment– def. when an accounting ploy to offload toxic assets to an unconsolidated LLC backfires.

The Bancorp’s Continuing Problems

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

We have written a number of papers since early 2015 detailing its “continuing problems with a discontinued commercial loan operation.” 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 Deal Between Friends Gone Bad

Buried in The Bancorp’s 3Q17 10-Q filed with the SEC on November 9, 2017, but not mentioned a week earlier when releasing its financials to the public was

Note 13

“The independent investor in Walnut Street, the securitization into which the Bank sold certain loans when it discontinued its Philadelphia commercial loan operations, has taken actions which may result in litigation.  

Specifically, counsel for the independent investor has requested that the Note Administrator hold monthly distribution payments in escrow until the independent investor’s alternative interpretation of the order of payments, as compared to the interpretation of the Bank and the Note Administrator, is resolved.  

Based on the independent investor’s request, the Note Administrator withheld the September 2017 payment to the independent investor and the Bank and indicated that it would continue to do so until this issue was resolved.”  

Based on names in a copy of the Purchase Agreement between The Bancorp and the LLC,  we believe that the sale was between two friendly parties rather than an arm’s-length transaction.

The so-called “independent investor” in the Walnut Street LLC  was Angelo, Gordon & Co (AG & Co.)  out of New York City.  According to its website, AG & Co. is a large $26 Billion manager of  “alternative investments” including commercial real estate mortgage-backed securities (CDOs).  

Legally speaking, AG & Co. is an unrelated, third party to The Bancorp and its Chairman Daniel G. Cohen.  But, AG & Co. is listed as a “banner investor” of a firm that merged into Cohen’s latest concoction — a “blank check” IPO called Fintech Acquisition Corp, which we have written about in our paper Fintech Acquisition “Blank Check” IPO: Buzzy Name Fuzzy Aim.

The  LLC’s “Directing Holder”  was Jonathan Lieberman, head of AG & Co’s considerable commercial and real estate loan trading operations.

The LLC’s  “Designated Manager”  was Kenneth L. Tepper, head of Kildare Financial Group, an independent contractor that has been used by the FDIC to sort out bankruptcy messes.  The initial address for the LLC was c/o PLANcorp in Gladwyne, PA, another Tepper controlled company.

It turns out Tepper has close ties to The Bancorp. According to a Bloomberg bio, Tepper has served as Managing Director of Financial Institutions Group at Cohen & Co, a firm founded by the family of Chairman Daniel G. Cohen.   In short, Kenneth L. Tepper was a front for The Bancorp when it set up the LLC in 2014.

The LLC’s corporate attorney  — Dechert LLP — has close ties  to The Bancorp as Dechert LLP is listed as one of the Bancorp’s corporate attorneys and defended them in an investor lawsuit.

Finally, we just want to mention that the very name for the LLC — Walnut Street 2014-1 Issuer, LLC. — marks the LLC as part of The Bancorp “family”, not a true partnership.

The Bancorp’s founder, Betsy Z. Cohen, the mother of Bancorp Chairman Daniel G. Cohen, was instrumental  reviving the Walnut Street area of downtown Philadelphia in the 1970s by making risky loans to startup restaurants in the area.  It is ironic that the same Walnut Street name that was associated with a civic-minded banker/mother in the 1970’s is now associated with a rule-bending banker/son now.

In sum, the dispute that The Bancorp quietly buried in Note 13 of its 3Q17 10-Q is about a deal between friends gone bad.  

The Toxicity of the Bancorp’s Unconsolidated LLC

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.  

On the next to the last trading day of 2014 when most of us are making New Year’s plans, The Bancorp issued a terse 8-K saying it had made the first sale to a partnership called Walnut Street 2014-1 Issuer, LLC.  

What caught our eye initially in early 2015 was NOT the financing structure.  That came out nine months later.  What caught our eye initially was the stark contrast in markdown between the sale portion to the LLC and the remaining portion of the discontinued loan portfolio.

 

 

In February, 2017, the Bancorp provided an update  (see above) to the loan portfolio held by its unconsolidated LLC in a note accompanying the release of its 4Q16 financials.

 Based on that information we calculated a 40.6% AVERAGE markdown of the LLC portfolio despite 79% of loan principals were classified “performing.”

What a joke! The incongruity of these two statistics confirms the meaninglessness of “performing” as a sign of loan quality when a loan operation engages in “extend and pretend.”

Obviously, a lot of the so-called “performing” loans had been modified to interest only with a balloon payment after a number of years. And the non-performing loans probably involve skipped balloon payments rather than skipped flat payments according to a normal amortization schedule.

We provided more detail about the Bancorp’s commercial loan operations that spawned this toxic loan portfolio in our February 2017 paper The Bancorp: An ‘Extend And Pretend’ Loan Operation That Won’t Go Away.

 

The Convoluted Structure of the Bancorp’s Unconsolidated LLC

Nine months after the Bancorp finally issued its 2014 10-K (another bank debacle detailed by us elsewhere), the bank revealed that it did not consolidate this LLC into its balance sheet despite the fact that the overwhelming proportion of the LLC’s financing came from the sale of notes back to The Bancorp itself.  The table below is our presentation of the variable interests in the LLC as detailed in Note H of the bank’s 10-Ks:

 

In electing not to consolidate, The Bancorp cited almost verbatim in Note H of its 2014 10-K (filed 9 months late), and in its 2015 10-K,  the criteria for consolidation specified in FASB 46R – Statement 167:

“(1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and

(2) through its interests in the VIE, the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.”

The fact that bank waited until the day before New Year’s to disclose this sale in a terse 8-K plus the fact that the structure of the deal was so convoluted,  giving its partner 51% of the voting stock despite practically no “skin in the game”,  suggested to us right from beginning that The Bancorp was testing the limits of Post-Enron GAAP.

In Note H of its 10-K, the bank had nothing to say about who had the most power to make decisions that affected the performance of the LLC.  It just ended the note abruptly with this conclusion:  “The company is not the primary beneficiary, as it does not have the controlling financial interest in WS 2014 (the LLC)  and therefore does not consolidate.”

We have written an accounting paper, The Bancorp: A Test for Post-Enron GAAP, presenting more evidence in support of our believe that it is The Bancorp that controls the LLC and not it’s so-called independent partner Angelo, Gordon & Co with 51% of the equity.   

In previous papers, we suggested that the bank’s independent auditor, Grant Thornton LLP, take a harder look at the Bank’s election not to consolidate.   We renew that suggestion here.  Oh…wait…

We see that in July 2017, The Bancorp appointed Mr. Armondo Burnette as Chief Audit Executive and Managing director.  The Bancorp’s website says

He will work with the Audit Committee and Executive Management to assess, direct and maintain The Bancorp’s audit management plan and oversee internal audits, risk assessments and audit finding remediation”.

It also says that

“Most recently, he was Director, National Business Advisory Services, for Grant Thornton LLP”

 

The Bancorp’s “Enron Moment”

An Enron moment– def. when an accounting ploy to offload toxic assets to an unconsolidated LLC backfires.

Clearly,  the so-called independent partner Angelo, Gordon & Co. (AG&Co) is not happy with the performance of the LLC and wants more cash out now.

AG&Co is a savvy player in the distressed commercial real estate market. They must have had a plan to get enough cash out early to more than cover their $16 Million investment before the flood of defaults inevitably arrives.

The LLC is clearly unprofitable.  Portfolio interest income (cash and accrued) is not enough to offset the $24 Million (non-cash) expense of additional markdowns plus the $6.6 Million in notes payable interest (cash) to The Bancorp and considerable legal expenses (cash).  

Even without precise numbers to calculate profitability, the LLC’s is clearly insolvent (assets – liabilities < 0) with $24 Million in additional markdowns since inception wiping out the $16 Million in initial equity.

The LLC is overall cash flow positive only because of the $24 Million in paydowns.

In our opinion, AG&Co has the edge in this dispute as they have 51% of the voting stock.  Even though there might have been documents created at the LLC’s inception that support the Bancorp’s position as to the distribution of cash to partners, it would seem to us that AG&Co has enough votes to rewrite these instructions in their favor.

The moral of this story is that you cannot both control and not control an unconsolidated LLC with a convoluted ownership structure.  

 

Categories
Crypto Economics

The Bancorp (TBBK) : An “Extend and Pretend” Loan Operation That Won’t Go Away

Advice First — Then Analysis:

Coinciding with a new CEO Damian Kozlowski, The Bancorp (TBBK) has been forthright in taking additional markdowns on it discontinued commercial loan portfolio. But, this has resulted in three successive quarters of unexpected losses followed by double digit percentage declines in its stock.

This article will present the case that these quarterly losses will continue throughout 2017 culminating in the need once again for a private placement to shore up its status as a “well capitalized bank” per Dodd-Frank.

The stock is NOT long term buy.  Nor is it a short at this time as there will be value funds like the bank’s 5th largest shareholder, Fuller & Thaler (of  behavioral finance fame) that will jump in when the stock falls below $4.75 / share.

At best, it is a short term trade with buys made AFTER quarterly announcements of losses and sells one month later as value funds complete their accumulation.

Analysis

Systemic problems with mortgage loan operations — originations and modifications — are flows which are capitalized into a long-dated assets or stocks.  Correcting bad origination practices, or changing the flows, does not change the prior stocks created by the flows.  

There were systemic problems with the origination and securitization of subprime residential mortgages a decade ago.  The process was corrected. But financial institutions, mostly the Federal Reserve Bank, still have a good portion of those troubled assets on their books.  The flawed origination process was stopped years ago, but the troubled loans still produce losses to this day.

Here is the analogy of the subprime debacle a decade ago to The Bancorp’s “continuing problems with a discontinued operation”:

On October 31, 2014, The Bancorp (TBBK) announced that it was discontinuing its commercial lending operations and set aside for sale a loan portfolio with a principal of a $1,124 Million. During the Conference call, the former CEO Betsy Cohen stated that  “…we do anticipate those sales being completed within the next 120 days.”

The flow process ended. But, two years later the bank still has nearly half of its loan portfolio either on its books or off-loaded to a non-consolidated, self-financed LLC.

There have been surprise loses due to markdowns / write-offs for the past three quarters.  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.”

During the 4Q16 conference call, when pressed about another private placement in late 2017, the CFO Paul Frenkiel said,

So right now we’re fairly comfortable we can work our way to a higher capital base without raising additional capital at this time.

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

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

The purpose of this article is question all of those statements.

Summary of Our Past Work

We have written a number of papers for Seeking Alpha on The Bancorp’s “continuing problems with its discontinued operations.”  There are two basic points we have tried to make:

  1. The portfolio was not fairly marked initially because “fairly marked assets sell fairly quickly.”
      1. The Bancorp: Bad Moon Rising (January 2015)  
      1. The Bancorp: Continuing Problems with a Discontinued Operation (March 2015)  
    1. The Bancorp: Why the Continuing Delays in Filing Its 10-K (May 2015)
  1. 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”.
      1. The Bancorp: Private Placement Needed To Shore Up Status as ‘Well Capitalized Bank (August 2016)
    1. The Bancorp: Oversold Says Richard Thaler’s Behavior Finance Fund (September 2016)

We have also written an accounting paper The Bancorp: A Test for Post-Enron GAAP which challenges the bank’s election not to consolidate the LLC created to off-load the most toxic portion of the loan portfolio.

Systemic Problems With The Bancorp’s Operations

Thankfully, the new CEO Damian Kozlowski has eradicated one systematic problem that plagued the bank in the past: a slowness to book markdowns / write-offs.

But,  we have identified two other systematic problems  related to specific bank operations.

The first systemic problem is the bank’s approach to what it known as  “troubled debt restructurings” — described by the bank in its latest 10-Q  as “loans with terms that have been renegotiated to provide a reduction or deferral of interest or principal because of a weakening in the financial positions of the borrowers.”

It turns out that the bank’s commercial lending operations had a practice of “extend and pretend” or “kicking the can down the road” which can disguise the true quality of a “performing loan.”

The classic example of turning a non-performing loan back into a performing loan is to modify the terms to allow for interest only payments for a number of years followed by a huge balloon payment at the end.  Shades of subprime mortgage debacle of a decade ago?

Evidence of the bank’s practices comes from interviews with former employees found in court documents (p.25-29) connected with a class action suit by investors suffering losses for the class period January 2011 through June 2015.

Here is detail explanation (p.27) of the practice from one former bank employee “CW3”

For instance, CW3 stated, “rather than actually calling the loan or forcing a liquidation or calling it what it is, sometimes the action that was taken was funding new money to pay the existing loan down, that was delinquent.” CW3 stated that another technique Bancorp used to “try to turn nonperforming loans into performing ones” was to “switch up” a loan’s amortization, which changed the cash flow and decreased required payments.

That class action lawsuit was settled out-of-court by fake do good lawyers for a paltry $17.5 Million or 15.5% of the $112.5 in total stock market losses claimed by  the plaintiffs.  Worse, the settlement was covered by The Bancorp’s insurance (see 3Q16 10-Q p.32) and so there was no hit to the bank’s financials.

The second systemic problem was the way the bank has wound down this discontinued loan portfolio.  

The most toxic portion was sold off first to an unconsolidated LLC accompanied a bare-bones 8-K sneakily filed the day before New Year’s Eve 2014. Two years later in 4Q16, The Bancorp finally provided enough detail to support our early 2015 assessment of the toxicity of  this off-balance sheet portfolio. (see spreadsheet below)  

With the most toxic portion removed, the bank has spent the last two years getting rid of the cleanest portions.

About 25% of the principal has been payed off / paid down. The bank touts this as a success. But, this means that the borrowers with the best finances and opportunities to refinance are off the books.  

The corollary is that the remaining borrowers have little ability to pay down and have relatively high loan-to-value (LTV) precluding them from refinancing with another lender at a lower interest rate.  

The remaining portfolio on the bank’s books has been shopped around to every regional bank in the Mid-Atlantic region for the past two years.

In 2Q15, loans totalling $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.

What is left is stuff no regional bank in the Mid-Atlantic would touch.  It’s like they say —  never shop at the farmer’s market at the end of the day as it’s all been picked over.

A Comparison of the Two Loans Portfolios

Below is a spreadsheet comparing the remaining portion of bank’s two loan portfolios in terms of

    • % markdown of remaining principal
    • % non-performing
  • % of initial principal that has been paid-down / off

And, in a later spreadsheet

  • A “reverse engineered” disaggregation of average % markdown overall into average % markdown by performing class  

This data comes from the end of the bank’s announcement of its 4Q16 results.  After two years of providing next to nothing, the bank suddenly discovered financial transparency.  This was likely due to a crescendo of pressure from investors coupled with a new CEO realizing that financial transparency (not the same as GAAP) is best in long run for the bank.

There are three statistics in the spreadsheet below that confirm our suspicions made two years ago that The Bancorp’s strategy was to bundle the most toxic and unsellable loans first and off-load them to an unconsolidated LLC which it obviously had to self-finance as no third-party would partner with them otherwise.

The first piece of confirming data was a 41% AVERAGE markdown of the LLC portfolio despite 77% of loan principals classified “performing.”  What a joke!  The incongruity of these two statistics confirms the meaningless of  “performing” as a sign of loan quality when a loan operation engages in  “extend and pretend.”  

Obviously, a lot of the so-called “performing” loans had been modified to interest only with a balloon payment after a number of years. And the non-performing loans probably involve skipped balloon payments rather than skipped flat payments according to a normal amortization schedule.

With no more “extend and pretend” possibilities, or refinance because the borrower is “underwater” with a current loan-to-value (LTV) > 100%, the endgame here is foreclosure followed by Chapter 7 or Chapter 11 followed by sheriff’s sale.

This sequence is similar to the loans largely responsible for The Bancorp’s losses in 2Q16 (The Schuylkill Mall in Frackville, PA) and 3Q16 (The Fashion Square Mall in Orlando, FL).

A third telling statistic is the difference in % paydowns / offs.  Here 62% of the bank’s original portfolio was paid down / off versus a paltry 6% for the LLCs portfolio.  

A high % means that the bank’s portfolio contained a lot of borrowers with spare cash to pay and/or appreciating assets — low current LTVs– that provided opportunities to refinance at lower interest rates.

A low % means that the LLC portfolio contains a lot of borrowers with interest first loans with no spare cash to paydown and depreciating assets — “underwater” LTVs > 100% — that provides no opportunity to refinance.

An Estimate of Future Losses

The commercial lending operation was discontinued in 3Q14, but it wasn’t until 2Q16, coinciding with a new CEO,  that The Bancorp finally began to account for the deterioration in the loan quality in the two portfolios.

Below is a chart of the FY16 discontinued portfolio markdowns and LLC note write-offs.

The Bancorp uses mark-to-market accounting for the portfolio still on its books, taking account of specific events like the 3Q16 foreclosure and subsequent Chapter 11 filing of The Fashion Square Mall in Orlando, FL.

The accounting is entirely different with the off-balance sheet portfolio in the 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, the bank uses note valuation accounting here.

Note valuation affords the bank discretion in models and interest rate parameters chosen to calculate discounted present value of the notes.   This variability in possible valuations was discussed at length during the  4Q16 conference call.

All of this is evidenced in the difference between 4Q16 LLC write-off of $13.2 Million discussed during a January 31st private call with analysts and $25 Million write-off discussed February 10th during the 4Q16 conference call.

Below is our estimate of addition mark-to-market markdowns for both portfolios.  The caveat is that our estimated markdowns for the LLC portfolio are internal to the LLC.  Whether or not they are reflected in the opaque, discretion-laden note valuation model used by The Bancorp is another matter.

The key to our estimate is a disaggregation of average % markdowns supplied by The Bancorp into markdowns by performance type.  The Bancorp helps us do this for the portfolio still on their books.

They disclosed an average 41% mark for subclasses like shopping malls which are laden with non-performing loans versus a average 5% mark for subclasses laden with performing loans.  

Tellingly, the bank did NOT reveal marks by subclass for the LLC portfolio.  But, simple tie-out math dictates that the components that weight the LLC  41% average be higher than the components that weigh the bank’s 15% Average.

We could see the LLC booking  $30+ Million yearly markdowns for the next 3 years.  Again, there is a caveat that what the LLC books internally according to mark-to-market GAAP  is not the same as what The Bancorp books as changes in discounted present values of notes from an unconsolidated LLC (now insolvent according to my reconstruction of its 4Q16 balance sheet).

In any case, the losses will not end soon and will plague the new CEO Kozlowski for the next three years despite his 4Q16 pledge  “I want to wind it down as quickly as possible…”

Categories
Crypto Economics

The Bancorp: Oversold Says Richard Thaler’s Behavioral Finance Fund

Summary

  • On September 29th, The Bancorp will hold a special meeting of stockholders to vote on a $74 Million secondary offering.
  • The terms and conditions are an insult to existing institutional investors and there is evidence that The Bancorp genuinely fears that a NO vote might win.
  • If a NO vote wins, the deciding votes will come from a hedge fund run by the famous behavioral finance theorist Richard Thaler.
  • If a NO vote wins, we predict that the stock will pop up 10% or more.

On September 29th, The Bancorp will hold a special meeting of stockholders to vote on a $74 Million secondary offering.

The terms and conditions are an insult to existing institutional investors and there is evidence that The Bancorp genuinely fears that a NO vote might win.

If a NO vote wins, the deciding votes will come from a hedge fund run by the famous behavioral financial theorist Richard Thaler.

If a NO vote wins, we predict that the stock will pop up 10% or more.

 In response to the subprime mortgage meltdown a decade ago, the US Congress passed the Dodd-Frank Act of 2009-2010 which, among other things, required FDIC-insured banks to maintain a Tier 1 leverage ratio (capital / average assets) greater that 5%.

This means that a relatively small (e.g. 5%-10%) mark down of a major asset class — whether it be loans outright or collateralized debt obligations — could wipe out a third or more of a bank’s capital. This would almost always cause a bank to fall below the Dodd-Frank standard for a “well-capitalized bank”.

Falling below the Dodd-Frank standard would trigger an existential crisis for the bank, forcing a merger or a private placement, often coupled with a massive shake-up of management and the board.

The Bancorp (NASDAQ:TBBK) has a two and a half years running history of erratic mark-to-market accounting of troubled commercial loans, followed by a series of moves to avoid falling below the Dodd-Frank standard for a “well-capitalized bank.”

We have documented The Bancorp’s problems in three previous articles for Seeking Alpha: The Bancorp: Bad Moon Rising (January 2015); The Bancorp: Continuing Problems with a Discontinued Operation (March 2015); and The Bancorp: Why the Continuing Delays in Filing Its 10-K(May 2015).

We have also published a recent accounting article called The Bancorp: A Test for Post-Enron GAAP that analyzes its late 2014 decision not to consolidate an LLC formed to buy the most troubled portion of its discontinued commercial loan portfolio.

Even though approved by its outside auditor Grant Thornton LLP, we believe that this decision is not in compliance with GAAP and have requested another review by the FDIC and the Federal Reserve Bank.

On July 28, 2016, The Bancorp announced a $31 Million loss for 2Q16, largely due to an unexpected $32 Million in loan mark downs / note write-offs associated with its discontinued commercial loan operation. The Bancorp’s balance sheet had been spared of any hits since the bank first announced the discontinuation of commercial lending operations on October 30, 2014.

During the 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 2Q16 surprise loss and follow-up conference call sent The Bancorp’s stock down 14% the next day.

Two weeks later on August 8, 2016, The Bancorp announced a $74 Million private placement of new stock with two new investors accompanied by terms and conditions suggesting that the bank was desperate to get a deal done. In particular, the new stock was priced below market at $4.50 a share and the two new investors each were offered a board seat.

We wrote in an SA article that this private placement was a defensive move motivated by a desire to reverse a downward spiral toward the Dodd-Frank standard rather than a positive move to acquire more capital to support more loan-making activity.

We also speculated that the bank’s existing institutional investors would be angered by the terms and conditions because they had invested comparable amounts over the past few years at prices in the $10 to $20 a share range with no offers of board seats.

On August 26th, The Bancorp issued a DEF 14A Proxy notice of a special meeting of shareholders to vote on this secondary offering. The date set was September 29, 2016 at company headquarters in Wilmington, DE with stockholders on record at the end of the day on August 15, 2015 eligible to vote.

In order to hold this meeting, a quorum of ½ of total outstanding shares — 18.9 Million of 37.8 Million total shares on record — must be cast in person or sent in by proxy. At its December 2015 annual meeting, a total of 29 Million votes were cast for the slate of Board members up for re-election. Average tally per Board Member was 25 Million YES, and 4 Million NO.

We think that the total votes in the upcoming special election will exceed 30 Million with 15 Million NO votes needed to stop this secondary offering from going through. The secondary offering can be stopped if at least 6 of the largest institutional investors (see list below) vote NO.

We think the “tipping point” votes will come from its newest and largest institutional investor, the behavioral finance fund Fuller & Thaler Asset Management. (more on them later)

A NO vote would mean that The Bancorp would have to look elsewhere for additional capital to shore up its status as a well-capitalized bank. Another private placement with new investors seems unlikely. A merger with another bank, possibly forced by the FDIC and Federal Reserve Bank, would appear to be the only option left.

In sum, The Bancorp’s Management and the Board would face an existential crisis with a NO vote on September 29, 2016.

While majority NO votes going against Management recommendations are rare, nevertheless there is evidence that The Bancorp’s Management and Board genuinely fear that a NO vote might win.

The evidence for this is an unprecedented flurry of positive PR announcements issued by the bank during the past month. This includes token open market purchases of shares by Directors and Officers, a “cherry-picked” sale of loans from the discontinued portfolio, a inconsequential deal with a Fintech startup, culminating in a vague cost-reduction and layoff announcement:

8/17 — 10,000 shares bought in open market by Director Bradley.

8/24 — 26,000 shared bought in open market by Chief Administrative Officer Leto.

8/26 — a “cherry-picked” new $65 Million sale of discontinued loans to First Priority Bank.

8/29 — 1,000 shares bought in open market by Chief Operating Officer McFadden.

8/29 — 20,000 shares bought in open market by Director Kozlov.

9/9 — 2,000 shared bought in open market by Chief Operating Officer McFadden.

9/14 — deal to front online banking startup VARO Money.

9/15 — a cost-reduction plan with no specific headcount or reserves booked for severance.

There is also evidence that institutional investors have a heightened interest in the outcome of this special election. First, on the August 15th cutoff date to be eligible to vote, an unprecedented 1.9 Million shares were traded suggesting a large institutional investor really wanted in. (see chart below)

ychart-of-tbbk

We are not sure, but the August 15th trading activity could have been based on inside information of the cutoff date, because we can find no prior public announcement of that August 15th date.

Second, a NASDAQ listing of The Bancorp’s institutional investors on record as of June 30, 2016 reveals an intriguing new, and now largest, investor. This new investor is Fuller & Thaler Asset Management– a hedge fund run by Richard Thaler, a University of Chicago professor now famous for theories on behavioral finance and “nudge”.

Thaler believes that behavioral economics can uncover cases where the “efficient-market” hypothesis is not working.

A Forbes article on Thaler’s investment strategy said that investing in companies with bad management accompanied by negative sentiment actually led to above average returns. The Bancorp would seem to be a perfect test for Thaler’s theories.

Thaler’s 2.2 Million share accumulation of The Bancorp stock during 2016 suggest that Thaler believe that negative sentiment has gone too far (led by us!) and that TBBK is in an oversold position.

The question is how will Thaler vote his 2.2 Million shares in the upcoming special election? And will the stock pop or drop with a majority NO vote? (We would love your take on these questions in the comments section.)

We think that Thaler will voting NO on the private placement. Also, we believe that the existential crisis caused by a NO vote will be overlooked by the stock market as it will be the first step in getting rid of bad management (fundamentally, the Chairman Daniel G. Cohen) and reversing the negative sentiment.

We predict that TBBK will pop 10% or more IF a NO vote wins. With Management and Board on the way out, the stock become a buy because its current price of $6.00+ a share is 15% below its current tangible book value of about $7.00 a share.

The Bancorp is not the only one facing an existential crisis here. As a financial analyst inclined toward exposing badly managed and overvalued companies, is our mission in life to create opportunities for outsized returns by behavioral finance investors like Richard Thaler?