Betsy Cohen and Frank Mastangelo have turned a boring bank into a stellar asset gatherer. In 2006 the company bought a software platform that enabled Bancorp to become the 4th largest Stored Value Card issuer in the country. This asset is completely undervalued by the marketplace. Stored Value Cards, Bancorp’s veiled business, are one of the most dynamic and fastest growing products in the financial industry.
TBBK, as the largest small bank issuer of stored value cards nationwide, has agreements with more than 300 non-bank financial service providers. Through these relationships Bancorp gains access to large customer groups at a lower acquisition cost and the unspent balance on the stored value cards from these groups stays on the bank’s books as deposits.
Bancorp has grown its deposit franchise to $2.5 Billion in deposits at the end of Q2 2011. From these deposits the bank can generate a spread by making SBA loans, commercial and home loans while investing the surplus in five year treasuries and short duration, risk adverse, municipal securities. The bank has managed to grow its assets annually at about 14% CAGR. TBBK has locked in a return that may generate tremendous earnings. The key is that the stored value deposits, which grew 57% year over year, only cost the bank on average eleven basis points or about 1/10 of one percent. For every point up in Fed Funds, the bank should realize 14 cents in additional EPS. The bank also receives a substantial fee for processing the transactions. In this low interest rate environment the bank has, during the last 4 years, grown this non-interest income by 38% CAGR.
Stored Value cards are replacing traditional bank accounts for individuals. It is similar to the change that Visa has benefited from; customers converting from using cash to credit cards. Due to recent regulations, banks have been unable to make low income customers profitable. They are encouraging these customers to leave the institution and set up a stored value account. This benefits The Bancorp as more customers leave the traditional banks and sign up instead for a simple “bank about in your pocket” - a stored value card.
Greendot (NYSE:GDOT) which operates the same business without the benefit of being a bank and taking advantage of the spread on deposits trade at more than 4x book value and about 23X 2011 earnings estimates. The Bancorp trades below book value of $7.91 and approximately eight times the 2012 earnings estimates.
Bancorp also has traditional bank assets invested in real estate assets. The bank operates with pristine credit, a 10% Texas Ratio and is exceptionally well reserved. Also, with most of the loans in the Philadelphia area, the loan portfolio is experiencing minimal loss rates. While most banks are experiencing lower growth and higher non-performing assets, TBBK has proven to be a solid bank with an unrecognized growth driver. The stored value business alone when valued relative to its comparables, is worth two times more then the current market cap. See the current slide presentation for financial numbers.
Insiders seem to know that Bancorp is a smart investment. The CEO has bought 207,500 shares or about $2,000,000 worth of stock in the open market in the last several months. Her last purchase of $900,000 at an $8.50 average price was done when the stock was trading fifty cents lower then her average fill price. The CEO knows that this business is worth much more then where it is trading and therefore is not price sensitive in her investing decisions. Below is the list of insider buys. I would not be surprised to see the Stored Value piece separated from the rest of the bank in a future IPO transaction at several times the current valuation.
At this point in the cycle an investor is buying a bank with excellent credit metrics (non performing assets under 1% with high reserves and very healthy capital ratios), an experienced management team with a history of selling banks at large valuations (Betsy Cohen sold Jeff Bank at 3x book) and a huge undervalued asset that if spun out in an IPO in 2013 could be worth a lot more than the price of the underlying institution.
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