A bank that financed the value-add plans of Sun Belt syndicators faces allegations it failed to disclose the default risk of bridge loans it made to those green operators, many of whom are struggling to hold on to their failing deals. 

Shareholders smacked the lender — The Bancorp — with a class action weeks after it told investors that two years of financial reporting “should not be relied upon,’” according to the complaint. 

A spokesperson for Bancorp did not respond to a request for comment.

The suit is among the first, if not the first, to tie a bank to the syndicator distress story. 

From 2020 through 2022, hoards of inexperienced operators seized on record-low interest rates and rising rents, snapping up fix-and-flip apartment properties across the Sun Belt. As rates rose and renovations subsequently stalled, default and foreclosures have stained the space. 

Until now, the highlighted creditors behind those deals were private and non-bank lenders, groups that include MF1, Ready Capital and Arbor Realty Trust.

Arbor’s lending practices have drawn the most attention.  

The U.S. Department of Justice and the Federal Bureau of Investigations launched a probe into the publicly traded REIT last summer after multiple short sellers accused the firm of “vastly” overstating the value of its allegedly distressed loan book. 

Since then, Arbor’s quarterly reports have shown more cracks. 

In a February earnings call, the REIT said it had whittled down its delinquent debt to $819 million in the fourth quarter but reported twice as many real estate-owned assets — or deals it took back through foreclosure — than it did a year ago. On the call, CEO Ivan Kaufman said the firm would likely cut its dividend in 2025 as profits sunk by one-third year over year. 

Claims against The Bancorp also stem from a short seller report. This time last year, Culper Research found the bank’s books were allegedly “rife with unsophisticated syndicated borrowers” drawn to investing by “‘get rich quick” dreams, according to the complaint. 

Bancorp made at least one loan to distress-ridden Tides Equities, according to Multi-Housing News.

The suit alleges the collateral for Bancorp’s bride loans is now “quite literally, crumbling,” exposing the lender and its shareholders to losses.

Culper’s report alleged nearly half of the $283 million short-term loans set to mature last year were troubled, and the bank’s loss reserves were both far below industry standards and insufficient to cover probable losses. 

The short seller estimated losses would be 10 to 15 times greater than the $4.7 million Bancorp had provisioned — the equivalent of 0.24 percent of its $2 billion loan book.

“TBBK’s Reserve Levels Don’t Pass the Laugh Test,” one heading in the Culper report reads. 

Before the bank disclosed its financials were unreliable, it reported stellar fourth-quarter earnings: net income of $1.15 per diluted share compared to 81 cents for the same period in 2023. 

It also underscored the “stability” of its bridge loans amid macroeconomic challenges, “evidenced by the estimated values of the underlying collateral.”

In the amended 8-K that flagged internal control discrepancies, the firm said it expected to boost its allowance for loan losses and would audit its Board of Directors.

Read more

• "Worst of the worst": Arbor Realty in trouble over multifamily lending
• Are Tides principals’ debts now high enough to bankrupt them?
• Syndicator Alan Stalcup personally liable for $285M, Benefit Street alleges

This article originally appeared on The Real Deal. Click here to read the full story.