The Real Money Is In Flipping Bank Charters, Not Houses

Author:
Publish date:
Updated on

Why is Philly-based Bancorp buying Michael Strauss's bankrupt American Home Bank? Yesterday, The Bancorp, a federally chartered online bank, with $1.6bn in assets, announced they had won AHB in a bankruptcy auction in April. The Bancorp is run by CEO Betsy Cohen who, while trying to recover from double-digit million dollar losses last year, is basically acquiring another federal bank charter for less than its tangible book value at the end of July.
That's a pretty sweet deal considering the discount to book becomes negative goodwill, which Betsy and her CFO can turn into an income pick-up, a move that will add to her bottom line when needed. When the bank charter was acquired by Strauss in October 2006, during the heyday of subprime lending and grandiose plans to model AHM Corp after Countrywide, Strauss actually paid in excess of 9 times tangible book value for the coveted bank charter. According to executives involved in the transaction, the multiple of the price paid to book value was a record.

Other non-bank players who could actually use a federal bank charter such as Wilbur Ross's American Home Mortgage Servicing Inc (AHMSI) confirmed they tried to buy American Home Bank six months ago but the Office of Thrift Supervision turned them down. Sources say the OTS wouldn't allow the sale of what they considered a non-troubled bank (although it was in bankruptcy) to a firm that wasn't already a bank, regardless of the firm's ability to pay. Executives involved in the deal said, "The OTS doesn't really help you unless they're in trouble on a deal and need help themselves."
We think something doesn't smell right.
Two people familiar with the transaction told Dealbreaker The Bancorp (Cohen is friendly with Wilbur Ross) is likely parking this federal charter for Ross or another non-bank firm. Andres Viroslav, The Bancorp spokesperson, refused to answer question regarding this charge and only referred us to the official press release which was light on details on the deal. However Cohen's press statement did say, "The acquisition...will enhance our continued growth of our private client business lines." The Bancorp has a history of setting up private-label banks for companies who don't have bank charters and runs the backend operations for them - a process they have done in the past for the AAA Auto Club.
There are $100 million of assets remaining in AHB consisting primarily of real estate loans and equipment. AHB was basically an online bank without a physical presence. The latest call report filed in March shows the bank was left with only $20 million in deposits. According to people who reviewed the deal, the deposits are primarily fast money brokered deposits and cds. There is not a lot of sticky money to help The Bancorp expand their 'national deposit gathering strategies', one of the corporate goals outlined in their press release yesterday.
Firms like the nation's largest independent mortgage servicer have a strong incentive to land bank deals. AHMSI confirmed that for them to maximize the earnings on their servicing business, they need to own a bank. This is a requirement because, as a servicer, they collect escrow payments and retain them until paid out. These payments then sit in a bank account and earn interest. If AHMSI owned the bank, they could also earn the interest on the escrow payments instead of leaving those to a third party. AHMSI currently services nearly $100 billion in residential loans and interest payments on those escrow accounts would really bolster the firm's bottom line.
There is one more important point buried in the fine print on this evolving deal. Copies of The Bancorp's deal terms show they are discounting any Federal Home Loan Bank (FHLB) stock owned by American Home Bank at a whopping 60 percent. In the past, FHLB stock has been considered a liquid asset. The 60 percent haircut effectively says the stock is almost worthless and we are not counting on the Federal Home Loan Banks to ever to return their excess FHLB stock. Returning excess member stock is like giving cash back to the member/community banks that bought the stock in first place. Paul Miller, top FBR bank analyst, warned about how this would affect the country's community banks' capital back in January, as first reported at Housingwire.
The bottom line is the OTS has too much flexibility to change the rules of the game as they see fit. If other big time servicers like Tom Morano's ResCap own a bank now through GMAC, why shouldn't the OTS let Ross's AHMSI play in the same sandbox?
Earlier from Teri Buhl: Former Harbinger Employee Attempting To Take Phil Falcone For A Ride
Teri Buhl is a Wall Street investigative reporter who written for the New York Post, Sunday Business, and HousingWire.com. Her big scoops include breaking news on all things wrong at IndyMac, calling out Bob Steel for lying to investors about losses on CNBC, and shinning a light on Wells Fargo for manipulating earnings with paper accounting gains. She resides in lower Fairfield County, CT.

Related