The Bancorp (TBBK) has built a strong balance sheet, delivered several outstanding quarters and has become an extremely well positioned bank in a very bruised banking industry. The Bancorp has a large negative enterprise value plus many additional very low values along our value metric, but the whole time that their value has been decreasing they have been providing outstanding growth in their assets - and doing so, possibly, in the most difficult time many of us have ever seen in the banking industry.
We selected The Bancorp because it's one of the select few that fits our model! Our goal is to select, purchase and monitor companies in an effort of gaining outstanding performing investments while minimizing risk for our clients. We will cover part of our review and selection process as well as explain why The Bancorp has currently become one of our selections.
The Bancorp has a goal to grow focused lines of business into recognized leaders in those particular niches. For example, a large in-flow of non-interest bearing deposits, like from Heartland Payment (a payment processing system) or AccountNow (AccountNow Prepaid Visa or Master Card). Reviewing the first quarter of 2009 to the first quarter of 2010, Bancorp assets are up about $700 million solely from these focused lines of business. Total deposits increased 26% or $385.4 million over the first quarter of 2009.
With that, The Bancorp believes that this year they have a larger pipeline of new relationships, which are coming onto the books more than ever last year. The in-flow is so strong that loan growth is obviously not going to be able to soak up all of that impressive core deposit growth.
TBBK is unique because they find it hard to maintain margins due to the large amounts of additional deposits flowing in.
Step 1 - We first search for companies with pristine balance sheets.
The Bancorp has roughly $338 million in cash, or $12.93 per share, after debt with a book value of $7.72. This is an outstanding balance sheet (especially for a small but fast growing bank in the current market environment, knowing many banks have either a poor business model and/or are bankrupt or severely hurt during this economy's up's and down's). They appear to have excelled in this past downturn, based on total assets.
TBBK has strong capital ratios, as seen in the following chart.
|Tier 1 capital||Tier 1 capital||Total capital|
|to average||to risk-weighted||to risk-weighted|
|assets ratio||assets ratio||assets ratio|
|As of March 31, 2010|
|The Bancorp, Inc.||8.64%||13.08%||14.33%|
|The Bancorp Bank||7.41%||11.23%||12.48%|
|"Well capitalized" institution (under FDIC regulations)||5.00%||6.00%||10.00%|
|As of December 31, 2009|
|The Bancorp, Inc.||12.68%||15.81%||17.06%|
|The Bancorp Bank||8.78%||10.97%||12.22%|
|"Well capitalized" institution (under FDIC regulations)||5.00%||6.00%||10.00%|
Step 2 - We like extremely low values.
The Bancorp has been achieving size, scale and gaining several competitive advantages to where they can now achieve scale with the many additional new services they are launching. Even though they have many competitors, they were able to excel in growth in their selected niches, even though they are on a price to sales below their peers.
|Price to Sales (TTM)||The Bancorp |
Step 3 - Is the operation or enterprise driving value to their shareholders?
The Bancorp receives another yes.
On March 10, 2010, TBBK re-paid the entire $45.2 million of fixed rate Series B preferred shares issued to the United States Treasury under it's Capital Purchase Program.
They had a strong quarter with an 8 cent profit before all the TARP related fees, which is significantly above the average forecast of a loss. Because of cost savings of interest due to TARP, we believe that TBBK will increase profits about 3.5 cents per quarter going forward, or about 14 cents a year.
They also have a strong history of creating wealth with Betsy Cohen. Betsy Cohen founded JeffBanks, Inc., and built it into the largest bank headquartered in Philadelphia. Then, she sold it in 2000 for $350 million, or 2.75 times book. Knowing her past record and her very well managed bank, Betsy has acquired over $700,000 of open purchases of stock in her own company during this banking downturn.
Step 4 - Is this a good business?
Banking is a simple and good business, but TBBK's focus of building niche markets allows them to be a gutter versus a shingle (like on a roof, the shingles collect most of the rain, but the gutters share in all the shingles' collections), making this appear to be one of the best bank models I have seen. Some of our past monopoly theorems have described the shingle versus gutter theory, but companies such as UniRush, Drake Software, Paybefore, Univision Communications, Inc., New Jersey Insurance Underwriting Association (NJIUA), 2nd Story Software, Inc., CareFirst BlueCross BlueShield's Individual HSA (Health Savings Account) program, LeagueSafe and many others are simply helping The Bancorp build a highly desirable or an operationally leveraged position in the banking industry.
Step 5 - Is the train wreck and then the fog from the wreck clearing?
When finding companies with a negative enterprise value, often a "Train Wreck" is needed to drive value close to cash.
The Bancorp has been a stellar performer compared to it's industry, but has also been caught in what might be the largest bank stock downdraft in over a generation. Outside of the many known banking industry problems that best the entire industry that TBBK must also address, we could find very little weakness in The Bancorp itself.
It is quite a strong sign that Ms. Cohen is constantly putting more of her personal wealth at risk with the company. We wish more companies followed her model.
We enjoy companies that can provide outstanding short term execution, while at the same time bring down the costs substantially and attempt to greatly enhance both their growth prospects and business model position with many new services driving their future success.
We believe The Bancorp has value, execution and a balance sheet like those past companies that fit our model (e.g. OIIM, SONS, SGI, LAB, DIVX, KHD, HCII and WCG). So, we're hopeful that TBBK will have a similar outcome knowing other companies that fit this model have performed well. They have completed excellent quarters and already attained growth of assets.
Part of our stock investment success has been because of companies being bought out. Knowing The Bancorp's founder's personal history of selling the first bank she founded, if TBBK receives a $2.75 value then that would increase the value of the company to about $21.23 a share.
With all the cash, good business model, profitable execution and high growing niches, we believe they are still valued as a model that might not achieve success - despite also how we believe TBBK is, again, starting to establish itself as one of the fastest growing banks, which has helped companies gain higher valuations in the past. We believe that they are undervalued, based on the following very basic valuation metrics:
- Revenue based: If you value TBBK at 2.50 times sales while the bank industry is 3.50 sales (Bank industry average), to gain parity, this adds up to an $11.20 stock market price, not including the cash.
- Earnings based: The average analyst is forecasting 63 cents in fiscal year 2011 and the banking industry PE ratio at $19.73. Using the current industry forecast plus the completed quarter, we're forecasting that TBBK, using 63 cents times $19.73, will come to a valuation of $12.42 per share.
With both models, the low valuation and especially with their short term superb execution (plus, good industry), they could and should, in our opinion, be valued significantly higher.
Disclosure: Durig Capital owns The Bancorp for itself, clients and related client accounts. When we published this article the stock was $7.40 per share.