The Bancorp Deserves More Time For The Bullish Thesis To Play Out
Over a year ago, in March of 2023, I decided to get more familiar with publicly traded banks. I had looked at them before, but never terribly in depth. However, I viewed the banking crisis that began that month as an opportunity to dig deeper into the space. And for the most part, my track record in evaluating these companies has proven to be quite positive. Some, I have been wrong about. And others, I have not yet seen the outcome that I have anticipated. But in this latter case, I do think that the companies in question require some additional time for the thesis to play out.
One good example involves The Bancorp (NASDAQ:TBBK), a bank with a market capitalization as of this writing of $1.61 billion. This bank is unlike most others in the sense that management has been focused a great deal on building up its payments ecosystem. This significant alternative source of revenue for the company has led to shares trading at a significant premium relative to most banks when it comes to the price to book multiple. But relative to earnings, the stock is still cheap. In addition to this, financial performance as of late has been impressive and the quality of the assets of the institution remains high. So even though shares are down 4% since I last wrote about the firm compared to the 21.1% rise seen by the S&P 500, I do believe that upside is on the table. This is in spite of the fact that management’s earnings results, even though they exceeded forecasts on the top line and matched guidance on the downside, sent shares spiraling down 7.8% the day after they were announced on April 25th.
The picture keeps getting better
Fundamentally speaking, things are going quite well for The Bancorp at this point in time. For starters, we should touch on the income statement side of matters. During the 2023 fiscal year, management generated net interest income of $335.7 million. That’s an increase of 38.9% over the $241.7 million generated in 2022. This came about even as deposits dropped. Based on the data provided, this increase was driven by a rise in the net interest margin that the company generates from 3.55% to 4.95%. Even though the company has had to increase how much it pays out on deposits from 0.82% to 2.32%, and even though debt increased marginally, the firm benefited from a rise in net interest earning assets and a surge in the returns that it generates off of those from 4.40% to 7.13%. On the deposit side, it does help that the overwhelming majority are demand and interest checking deposits that carry a much lower interest rate of 2.30% compared to the 4.13% that time deposits have and the 3.66% that savings and money market accounts paid out last year.
As net interest income rose, non-interest income also grew. But its increase was far more modest, with a rise from $105.7 million to $112.1 million. The picture would have been better had it not been for a decrease in net realized and unrealized gains on commercial loans from $13.5 million to $3.7 million. But fortunately, prepaid, debit card, and related fees revenue, collectively shot up from $77.2 million to $89.4 million. This, combined with the aforementioned net interest income increase, helped the company increase its net profits from $130.2 million in 2022 to $192.3 million in 2023. This is a rather robust rise on a year-over-year basis.
It is worth noting that, after the market closed on April 25th, the management team at The Bancorp announced financial results covering the first quarter of the 2024 fiscal year. For that time, net interest income totaled $92.2 million. That’s up nicely from the $83.9 million reported one year earlier. A continued growth in its balance sheet, not only with deposits, but also with them loans and cash and cash equivalents, allowed for this improvement on a year-over-year basis. Non-interest income, meanwhile, totaled $29.4 million. That’s marginally above the $29 million reported for the first quarter of 2023. Total net revenue for the company was $123.8 million, which exceeded analysts’ forecasts by $28.8 million. So that is nice to see. When it comes to the bottom line, the picture also improved year over year, with net income growing from $49.1 million to $56.4 million. On a per share basis, this was a rise from $0.88 to $1.06. That was actually in line with what analysts were hoping for.
This isn’t to say that everything has been perfect. The institution did see a decline in deposits from $7.03 billion to $6.68 billion. While this is disappointing, it is an increase from the $6.56 billion that the bank had at the end of the second quarter of last year. So even though we do have a year-over-year decline in deposits, at least we are seeing these start to increase again. For the first quarter of the year, management reported a further increase in deposits to $6.89 billion. That’s an increase of $209.9 million compared to what the company had at the end of 2023. But that’s not quite enough to let the firm surpass the number of deposits seen at the end of 2022. Another thing that’s very bullish in my mind is the fact that only 8% of the bank’s deposits are uninsured. This is far lower than the 30% maximum threshold that I typically prefer and, in fact, it’s very near the lowest that I have seen for any bank.
While deposits increased, the value of loans also pulled back slightly, dropping from $5.46 billion in 2022 to $5.33 billion in 2023. But for the first quarter of the year, we saw a slight recovery to $5.43 billion. There were other changes as well. At the end of 2022, the company had $766 million in securities. By the end of last year, this had dipped down slightly to $747.5 million. But this wasn’t the only drop. By the end of the first quarter, securities took another leg lower to $718.2 million. On the other hand, we did get an increase in cash from $888.2 million to $1.25 billion over the same window of time. And that was greater than the rise seen in debt from $122.5 million to $147.8 million.
All things considered, the picture here appears to be rather solid. The year-over-year drops that we got in certain balance sheet categories is disappointing. And if we do see some sort of trend here start to develop, my mind set on the matter could change. But while these numbers were lower year over year, all of them were higher than what was experienced in the second quarter of 2023 when banking conditions were really starting to deteriorate. The next thing we need to discuss, however, is how shares are priced and what this means for investors moving forward.
In the chart above, I addressed this by looking at the price to earnings multiple of the company compared to five similar financial institutions. What we see is that our candidate, with a price to earnings multiple of only 8.9, is the cheapest of the group. I then, in the chart below, compared it to the same five companies using the price to book approach. This is where the company looks off. It’s actually the second most expensive of the group. But again, management’s focus on building this into a more diverse institution than just a traditional bank, as well as the strong revenue and profits that come with it, justify this sort of premium.
We should also, obviously, be paying attention to asset quality. And this is where The Bancorp truly shines. In the first chart below, you can see the return on assets of all six firms I’m looking at within this article. With a reading of 2.50%, The Bancorp is by far the most appealing prospect, ranking at the very top of the list. But it’s not just this metric that’s impressive. In the subsequent chart, you can also see the return on equity for the bank compared to the same five firms. The 25.62% reading that we get for it far surpasses any of the other banks. So this also indicates that the quality of its assets is incredibly high. And that’s exactly why, at the end of the day, a high price to book multiple is acceptable.
It should be mentioned that management did come out with some other interesting developments for the first quarter. For starters, the company decided to double its share buyback program from $50 million to $100 million. But perhaps more important than that was the decision by the company to allocate around $900 million toward commercial and residential mortgage-backed securities. This has been done to lock in yield for the long run, given that interest rates are widely expected to fall starting later this year or sometime next year. The effective yield on these securities is 5.11%, which is quite solid, especially if interest rates drop. This forward-thinking approach to business is very encouraging to me, and it shows that management’s head is on right.
Takeaway
Based on the data provided, I am a little surprised as to why shares have not risen much from this point. The company is a high-quality player in its space and its results should continue to impress moving forward. In some respects, it may not be the cheapest opportunity out there. And I don’t like that some of its balance sheet shrank year over year. But when you look at the overall trend with those items, and factor in all the positives, it’s difficult not to be bullish about the business. Due to these factors, I’ve decided to keep the company rated a ‘buy’ for now.