The Bancorp: An Atypical Bank That Keeps Growing (NASDAQ:TBBK)

The Bancorp (NASDAQ:TBBK) is a bank headquartered in Wilmington, Delaware. Unlike many other regional banks, TBBK has a very elastic financial structure, dictated by the prevalence of short-term variable loans.

Recently Q4 2023 was released and in my opinion, the results were quite positive.

Profitability ratios have increased and are closer to the long-term target; at the same time the efficiency ratio has reached an excellent 41% and EPS has increased by 54%. The guidance for EPS 2024 is $4.25, a 22% increase from current levels.

In sum, TBBK has performed excellently in the current macroeconomic environment and has benefited from rising rates. Its asset-sensitive structure has allowed it to take the NIM well above 5%, but now analysts are asking how long this is sustainable. After all, in a few quarters, the macroeconomic environment will change again as the Fed reduces rates, and the asset-sensitive structure could lead to downward pressure on the NIM. In this article, I will shed light on the future of this bank.

Loans and fintech business

The loan portfolio reached $5.68 billion, let’s look at the individual segments in detail:

• Real Estate Bridge Lending mainly includes apartment buildings and has a weighted average interest rate of as high as 9.30%. At origination, the average LTV was 72%.
• Institutional Banking accounts for 32% of the loan portfolio and has a weighted average interest rate of 6.80%. SBLOC loans are backed by marketable securities with nominal credit losses; IBLOC loans are backed by the cash value of life insurance policies with nominal credit losses.
• Small Business Lending accounts for 15% of the loan portfolio. 45% of them are fully guaranteed by the U.S. government; Commercial mortgage SBAs have an LTV at origination between 50%-60%. The estimated yield is 7.30%.
• Commercial Fleet Leasing represents a niche of vehicle leasing solutions. The estimated yield is 7.40% and focuses on a few vehicles, less than 150.

These four segments have enabled TBBK to perform well in 2023, but the fintech segment should also be mentioned. Management believes strongly in the latter since it is a scalable business with high margins due to the use of operating leverage.

In 2023 $99.23 million in revenue was generated, a 15% increase over 2022. Fintech solutions are a big part of the revenue, about 21%. It is likely that this figure may increase over time for two reasons:

• The loan portfolio may not always perform as well as it did in 2023.
• By 2030, TBBK wants to become a leading financial company in fintech solutions.

Deposits and NIM

Deposits reached $6.40 billion, a figure very similar to that of 2022. Their cost has increased a lot YoY, but 2.32% is still a great result when compared to its peers. Some regional banks in order to get liquidity are willing to grant CDs at 5%, something TBBK does not need. As mentioned in the intro, this bank has a very flexible financial structure and has a lot of leeway. After all, its LTD ratio is 88% and liquidity is 13.50% of total assets. By the way, short-term loans will also mature with time.

At first glance, it would seem that TBBK is in an ideal situation, and indeed it is. The price per share is not coincidentally near an all-time high: management has done an outstanding job in 2023 and has anticipated the Fed’s moves. However, now a question arises: if rates are set to fall, can TBBK only get worse given its asset-sensitive structure? Yet the guidance speaks of sharply rising EPS in 2024. The answer to this question is rather complicated.

First of all, management is intent on changing strategy, in fact, compared to last year, it is 14% less asset sensitive. This was achieved by buying fixed-rate and long duration securities, the exact opposite of what has worked for the past 3 years. Moreover, this process of transforming the balance sheet is just beginning, in fact, the moment the yield curve normalizes the exposure to fixed-rate securities will be increased even more.

So we believe that as we approach the real rate hike probably in the June time frame, you’ll get a dis-inversion Of the yield curve at which time we’ll add very low-risk agency and mortgage-backed security exposure, thus closing the majority of that asset sensitivity. Therefore, you will not see an impact a substantial impact on our profitability. However, obviously, NIM will fall. And the NIM will fall because the bond purchases are likely to be of a lower coupon than some of our loan portfolio.

CEO Damian Kozlowski

All this will lead to a reduction in the NIM, but its outlook nevertheless remains positive. Today, it is at 5.26%, in the worst-case scenario, it could fall between 4.50 % and 5%: but it would still be an outstanding result. Moreover, TBBK is not a bank that operates according to traditional standards but tends to have a more dynamic approach. So, the fact that NIM is expected to decline does not preclude the possibility of improved profitability.

As you know, the NIM is for banks, the NIM is very important if you’re a traditional bank; right? But in our weird situation, we can actually lower our NIM and substantially increase our net income just by getting a spread on our bond purchases; right? So that usual correlation where you see the NIM drop, no profitability is going to go down. Now ours will actually go up.

CEO Damian Kozlowski

Once fixed rates are locked in and the decline in the Fed Funds Rate begins, the cost of deposits will fall more than the yield on assets. This process will create a positive spread that will still make TBBK highly profitable. Of course, this is the strategy, but there may be events that can completely upset it. For example, if the Fed is forced for some reason to cut rates a lot in 2024, this could be a problem for TBBK. Despite improvements, the latter still remains asset-sensitive.

Finally, to conclude with the 2024 EPS estimate, management pointed out that it was quite conservative. In fact, the number does not take into account the buybacks that will be made. TBBK is a bank that prefers to buy back its own shares to remunerate shareholders, which is why it avoids issuing dividends. Obviously, this has a positive impact on EPS, but it has not been included in the estimate for 2024: thus the bank has secured a slight margin of safety.

Conclusion

The Bancorp is an atypical bank that I personally find very interesting. Its dynamism is what has given it an edge over its peers, and I expect it to do well in 2024 as well. However, although its strategy is highly profitable, the risks involved should also be highlighted. Compared to a traditional bank, its future is much more difficult to determine, for better or worse.

The bank is currently well-capitalized, which is rather surprising given the continuous buybacks it makes. The profits it has generated in recent years have allowed some flexibility in making choices and taking advantage of market opportunities. I personally expect the same to be true for 2024, but it is wise not to get too excited.