Niche banks led the industry in 2020 and continue to perform well in a competitive banking environment, serving unique customer groups and offering differentiated financial products.
The Bancorp (NASDAQ:TBBK) is one of these players offering not only different kinds of lending products, but also its own unique payments software that serves fintech disruptors and other industries seeking access to banking products. With such an exciting business model, The Bancorp deserves a higher valuation to go with it.
The bank of fintechs
With roughly $6.3 billion in assets, The Bancorp has carved out a niche among fintechs and others that don't have bank charters but still want to offer banking products or services. The bank invested heavily in building out the necessary payments infrastructure that allows it to provide the back-end services that companies need in order to offer some banking products under their own personal brands. These back-end services include the regulatory platform needed, as well as access to the payment networks run by Visa and Mastercard that actually facilitate card transactions.
Using The Bancorp as a sponsor bank, another company could offer its customers pre-paid or debit cards, or consumer or business checking, savings, and money market accounts under their specific brand. Not very many banks offer this type of technology, and The Bancorp has used it to cater to the fintech community, including clients such as PayPal, Chime, and SoFi. Additionally, The Bancorp's products can be used by clients in healthcare or government, or for gift or incentive cards.
All of its offerings have helped make the bank attractive to investors. Nonbanks can't hold deposits, so the deposits generated through its clients' programs flow to The Bancorp. And most of the deposits generated are through different kinds of checking and debit card accounts that only pay out a little bit of interest, making them a cheap source of funding. Fintechs like PayPal, which also owns Venmo, and Chime are much better at marketing and at attracting customers than a small bank, so it makes The Bancorp's deposit gathering a lot easier.
A great source of fee income
Pre-paid and debit cards are a great source of non-interest or fee income because The Bancorp receives contractual fees from the companies it works with on a per-transaction basis, and through monthly service fees. In 2020, The Bancorp made $75.5 million on pre-paid and debit card fees, and another $7.1 million on card and other payment processing fees. In the same time period, non-interest income made up about 30% of total revenue, which is great for a bank of its size.
This number is expected to grow a lot this year because it's based on gross dollar volume, which represents total dollar spend on pre-paid and debit cards issued by The Bancorp. This figure will likely jump as the economy recovers, its existing clients grow, and The Bancorp brings on more clients.
A fair question might be: What if some of the fintech disruptors go out and get an actual bank charter, so they can handle all the necessary back-end banking services on their own? It is no secret that SoFi is trying to obtain a charter. But bank charters can require lots of resources and investment, and ultimately take years to obtain, which might distract a high-flying fintech start-up from growth.
The Bancorp also typically makes long-term contracts with its partners, and CEO Damian Kozlowski thinks his company can potentially offer fintechs an easier and lower-cost substitute for a bank charter, along with services that companies still might want to use even if they have a charter. Furthermore, The Bancorp clients in the healthcare and government sectors are not going to get a banking license, and the bank's diversity of customers is only likely to grow.
Niche lending products
In addition to a unique payments infrastructure that brings in lots of deposits, The Bancorp offers a lot of different lending products, including U.S. Small Business Administration loans.
But the company's largest lending segment has become securities-backed lines of credit (SBLOC) and insurance-backed lines of credit (IBLOC). These loans are collateralized by marketable securities and the cash surrender value of insurance policies. Reported as one business line, SBLOC and IBLOC loans grew by more than 50% in 2020 and helped boost net interest income by 38% during the year -- very impressive growth during the pandemic.
These loans have experienced no losses yet because of the nature of the collateral. Even when markets declined significantly in 2020, The Bancorp noted in its third-quarter regulatory filing that the reduction in the underlying collateral of SBLOC loans had been less severe because the collateral also contains debt, which didn't lose as much value as equities (or even increased in value). The Bancorp also said in its filing that the collateral in many cases is managed by professional investment advisors that do some hedging against market downturns.
Shares are undervalued
With the stock trading at $18.62 as of Tuesday's close, The Bancorp is valued at 185% of book value. As far as the industry goes, that's pretty good right now, but Kozlowski has not hidden his belief that shares are undervalued, saying on the company's recent earnings call that he thinks shares should be trading in the low $20 range.
The bank had excellent profitability in 2020, and is projecting $1.70 earnings per share for this year, 24% higher than 2020. These estimates also do not include the share repurchases the bank plans this year.
Earnings like this will keep increasing tangible book value. And other institutions working with start-ups or operating innovative business models, like SVB Financial Group or Silvergate Capital, have valuations exceeding 300% or even 400% of tangible book value, so it would not surprise me to see The Bancorp's stock price and valuation rise significantly, sooner rather than later.