TBBK - The Bancorp Q2 Earnings: The Golden Period Continues

2023-08-04 07:57:52 ET

Summary

• The Bancorp has achieved impressive financial results despite the challenging banking industry environment, with a revenue growth rate of 41% and a ROE of 27%.
• The success of this bank lies in anticipating monetary policy trends and continuously rebalancing its assets.
• The Bancorp plans to rebalance its activities and increase its fixed-rate assets to mitigate the impact of potential rate cuts in the future.

Intro

It is not an easy time for the entire banking industry, as the rapid rise in interest rates has led to increasingly expensive bank funding. In addition, since interest rates are high, businesses and households tend to borrow less. However, The Bancorp ( TBBK ) seems to be operating in an entirely different macroeconomic environment.

Q2 2023 revenue growth rate was 41%, ROE reached 27%, and the efficiency ratio is extremely low, 42%. In other words, this quarterly report does not seem to belong to a bank operating in such a turbulent environment. In fact, as a sign of the excellent results so far, the price per share has shot up to a new all-time high.

The strategy

The main reason why The Bancorp is now in an optimal situation compared to its competitors is because it managed to employ the right strategy at the right time. In particular, management was able to anticipate the sharp rise in interest rates and positioned its assets in such a way that they followed the trend of monetary policy. Over the past 4 years, fixed-rate assets have decreased from about 35 percent to 26 percent, giving more weight to floating-rate assets. This has allowed The Bancorp to perform increasingly well as interest rates rise, which is why today the net interest margin has reached 4.83% compared to 3.17% in Q2 2022. In other words, this bank has anticipated the Fed's decisions, and thanks to a rather flexible balance sheet structure has managed to achieve well above-average results.

Anyway, it is clear that interest rates cannot rise indefinitely and we are probably close to a halt. For this reason, management is already rebalancing its activities so that it can place itself ahead of Powell's choices again.

So if you looked at what we did over the last 4 years as we went from the mid-30s to 26% fixed rate assets, and we’re already back to 32% fixed rate assets and have taken 11% asset sensitivity off the board because now we’re flexing the balance sheet back to a fixed rate structure with a target of 60% in order to mitigate our deposit beta, which is about that. So I think we’re going to be very flexible over the next 18 months. I don’t think there is going to be a big change in rates, and we’re going to have time to adapt to change our structure to be much more fixed to mitigate the downside impact that there is rate cuts.

CEO Damian Kozlowski, conference call Q2 2023

Fixed-rate assets are currently 31 percent, but the goal is to reach 60 percent over time. Certainly this rebalancing will happen gradually, and there is no rush to lock in current interest rates. At the moment there is no need to upset the flexibility of the financial structure, partly because Damian Kozlowski does not expect major changes in the coming months in terms of interest rates. Clearly, again, proper timing is crucial for Bancorp to continue to be the outlier in the banking sector.

As for how to lock in current interest rates, it is unlikely that at least for this year they will opt for government bonds according to the CEO's statement. At current rates, Treasury bonds are definitely attractive, but the company does not seem intent on investing the large amount of cash in its balance sheet now. Currently, there is room to improve the bond portfolio and about $1 billion or $1.50 billion could be invested, but they will probably wait until mid-2024.

The only securities The Bancorp is buying are its own shares, in fact in Q2 2023 it bought 828,727 shares at an average price of $30.17. A buyback of $25 million each quarter is expected for Q3 and Q4.

In general, since it does not issue dividends, The Bancorp used to make buybacks to remunerate its shareholders, and it will probably follow this line in the next 5 years as well. Personally, I agree with the preference of buybacks over dividends for a fiscal matter, but it will be important that the company does not overpay for its shares, otherwise it risks not making the best use of its available capital. The buyback is efficient when the share price is at a discount, now it has just passed the all-time high.

For the time being, buybacks and unrealized losses recorded in accumulated other comprehensive income have not restrained growth in book value per share, up 19 percent from Q2 2023.

Additional relevant information

Defining The Bancorp as a traditional bank may prove to be a mistake, in fact there are some traits that differentiate it from its competitors, such as the short duration of its assets, as well as its low risk profile and its focus toward fintech solutions.

The latter, are becoming increasingly important and to date account for 22% of total revenues. Gross dollar volume has increased by 15% since last Q2 2022, which is quite encouraging. In addition, the CEO expects that 2024 will bring even more than 15% growth in the fintech segment since the recent investments will take months before they achieve a significant impact.

Due to significant implementation times that can last 18 to 24 months, we have good visibility on the potential growth in 2024. Our current estimate is that we will have above trend GDV growth in 2024 of more than 15%. Key areas of growth are neobanks, healthcare and new corporate payment programs. In addition, we continued to strengthen our relationships with our key members of our ecosystem and recently signed a long-term extension and expansion of our partnership with Chime. We continue to invest a lot of time and energy across our company in the development of new products and services, especially expansion of fee businesses and the monetization of our core capabilities.

On the deposit side, the payments business is dragging up their growth. Of course, their cost is also increasing since current money market rates are very high, but the current level reached does not seem worrisome: 149 basis points higher than in 2022. In fact, despite this increase, as we noted earlier the net interest margin continues to rise and is now approaching the 5 percent threshold.

Finally, regarding the soundness of deposits, the situation seems optimal. Ninety-one percent of them are insured, as the average customer of The Bancorp has deposits whose amount is rather low. This may also prove to be an advantage on the cost side, since those who present small deposits are less enticed to invest them in the money market since the return will be minimal.

Conclusion

The Bancorp is an atypical bank in that it operates under different criteria than its competitors, and this has meant that during the rising interest rate phase its net interest margin has continued to increase. The results of the last few quarters are definitely positive, and I am not surprised that currently the price per share has hit a new all-time high.

Buybacks will continue to reward shareholders, and management will most likely continue its expansion plan regarding the payments business. Finally, regarding the flexibility of the balance sheet, we can expect major but gradual changes. There will be investment in fixed-rate assets that will avoid a sharp deterioration in the net interest margin when the Fed reduces interest rates, but this is a process that will be carried out over the next 2 years probably.

Overall, Q2 2023 was a success in more ways than one, and I look forward to any developments that take place in the coming quarters.

The only reason I do not think The Bancorp is currently a buy is that I prefer to avoid buying a bank when its price/book value per share is so high when compared to its historical values. After the results achieved in the past year, I might even consider paying a premium price for this bank, but not as high as the current one. I feel unconfident about the margin of safety I would have by buying today.

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